FIN 502 Chapter Notes - Chapter 3 and 4: Current Liability, Personal Finance, Income Statement

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29 Nov 2017

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Fin chapter 3 setting goals and the financial planning process. A financial goal must possess tow attributes: the goals outcome can be measured precisely in dollars and there is a deadline for its completion. Financial goal (at time n) = existing savings + investment income for n years on existing savings. Chapter 4 measuring and controlling personal finances. Articulation the income statement items all link directly to the balance sheet and the net worth amount is exactly the sum of all previous incomes minus dividends paid. Family any group of people who share their wealth, revenues and expenses. Financial assets provide income or are part of what you will consume in retirement. Personal use assets used in everyday life. Luxury assets very marginal to family needs, also for personal use. Current liabilities due within one month, i(cid:374)(cid:272)lude the (cid:272)u(cid:396)(cid:396)e(cid:374)t (cid:373)o(cid:374)th"s po(cid:396)tio(cid:374) of a lo(cid:374)g te(cid:396)(cid:373) liability. Long term liabilities due later than one month and often payable for many years.

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Assume that you have $1,000 to invest, so insert 1000 as your Present Value in the following table. Assume that you want to invest your money for 5 years (insert 5 for Number of Periods). Assume an annual interest rate of 3.00% (insert 3 for Interest Rate per Period). The table will determine the Future Value of your investment. If you input the numbers correctly, your Future Value is computed to be $1.159, which is what your investment will be worth in 5 years. Now revise the input to reflect your actual savings and the prevailing interest rate so that you can see how your savings will grow in 5 years. Even if you have no savings now, you can at least see how the interest rate affects the future value of savings by revising your input in the Interest Rate per Period and then observing the change in the Future Value. Future Value of a Present Amount Present Value $1,500 Number of Periods 5 Interest Rate per Period 3.0% FV = PV*(1+R)^N Future Value $1,739 2. Assume that you have $1,000 to invest at the end of each of the next 5 years, so insert 1000 as your Payment per Period in the following table. Assume that you want to invest your money for 5 years (insert 5 for Number of Periods). Assume an annual interest rate of 3.00% (insert 3 for Interest Rate per Period). The following table will determine the Future Value of your investment. If you input the numbers correctly, your Future Value is computed to be $5,309, which is what your investments will be worth in 5 years. Now revise the input to reflect your actual expected savings per year over the next 5 years, and existing interest rate quotations so that you can estimate how your savings will grow in 5 years. You can now revise the table to fit your own desired level of saving. Future Value of an Annuity Payment per Period $1,500 Number of Periods 5 Interest Rate per Period 3.0% FV = FV(R, N, PMT, (PV), beginning=1, end=0) Future Value $7,964 3. Assume that you want to deposit savings that will be worth $10,000 in 5 years, so insert 10000 as the Future Amount and 5 as the Number of Periods in the following table. Assume an annual interest rate of 3.00% (insert 3 for Interest Rate per Period). The following table will determine the Present Value, which represents the amount of savings you need today that would accumulate to be worth $10,000 in 5 years. If you input the numbers correctly, the Present Value is estimated in the table to be $8,606. Now revise the input to reflect your own desired savings amount in 5 years so that you can estimate how much you need now to achieve your savings goal in 5 years. Present Value of a Future Amount Future Amount $20,000 Number of Periods 5 Interest Rate per Period 3.0% PV = FV / (1+R)^N Present Value $17,252 4. Assume that you want to deposit savings at the end of each of the next 5 years so that you will have $10,000 in 5 years. So insert 10000 as the Future Amount and 5 for Number of Periods. Assume an annual interest rate of 3.00% (insert 3 for Interest Rate per Period). The following table will determine the Annual Payment, which represents the annual payments that will accumulate to your future desired investment. If you input the numbers correctly, your Annual Payment is computed to be $1,884. Now revise the input to reflect your own desired savings amount in 5 years so that you can estimate how much you need to save per year to achieve your savings goal in 5 years. Compute Payment Needed to Achieve Future Amount Future Amount $20,000.00 Number of Periods 5.00 Interest Rate per Period 3.00% PMT = FV / [FV(R, N, -1)] Annual Payment $3,767

Decisions 1. Using the above formulas and understanding of the impact of interest rates and time on your savings, report on how much you must save per year and the return you must earn to meet your savings goal for graduation, and your savings goal in your first three years of post-graduation life.

I need a report on how much to save per year and the return to earn to meet savings goal for graduation, and savings goal in the first three years of post graduation. Can you please use the numbers above that are already calculated in the formula. I have had an answer on this below. I don't understand why the periods don't stay the same for 5 years. The annuity is 7964 I took that divided b y 60 = 132.7 per month and multiplied it by 12 for a year and got 1592.4. Is that the savings for the answer to saving for a year. IF not I need help figuring out the calculation for the return to meet after gradutaion and the next three years post graduation.

Goal 1	Savings Goal for graduation, FV	$ 20,000

	Time till graduation (Number of periods)	5

	Present value of savings	$ -

	Expected interest rates	3%

	Savings needed per year, PMT	$3,767.09	=PMT(3%,5,0,20000,)

Goal 2	Savings Goal for 1st year of post graduation, FV	$ 15,000

	Time till post graduation year 1 (Number of periods)	6

	Present value of savings	$ -

	Expected interest rates	3%

	Savings needed per year, PMT	$2,318.96	=PMT(3%,6,0,15000,)

Goal 3	Savings Goal for 2nd year of post graduation, FV	$ 15,300

	Time till post graduation year 1 (Number of periods)	7

	Present value of savings	$ -

	Expected interest rates	3%

	Savings needed per year, PMT	$1,996.75	=PMT(3%,7,0,15300,)

Goal 4	Savings Goal for 3rd year of post graduation, FV	$ 15,606

	Time till post graduation year 1 (Number of periods)	8

	Present value of savings	$ -

	Expected interest rates	3%

	Savings needed per year, PMT	$1,754.99	=PMT(3%,8,0,15606,)

A decrease in an asset account such as inventory would be considered a source of cash while a decrease in a liability account such as accounts payable would be considered a use of cash. True or False

Trade credit is extended on purchases to a firmâs customers and appears as accounts receivable on the balance sheet of the customer and as accounts payable to the seller. True or false.

Which of the following statements is false? a. M1, M2, and M3 include demand deposits and other checkable deposits. b. Term repurchase agreements are included in M3, but not in M1 and M2. c. U.S. savings bonds are included in M3, but not in M1 and M2. d. Travelersâ checks are included in M1, M2, and M3.

Responsibilities of the Federal Reserve include all of the following EXCEPT a. overseeing monetary policy action b. setting the reserve requirement for depository institutions c. approving discount rates recommended by member banks d. controlling currency exchange rates

You need to have $35,000 on hand to buy a new Lexus five years from today. To achieve that goal, you want to know how much you must invest today in a certificate of deposit guaranteed to return you 9% per year. To help determine what todayâs investment sum must be, you will use: a. present value factors b. future value factors c. present value factors of an annuity d. future value factors of an annuity

The financial statement that provides a snapshot view of the financial condition of a business at a point in time is the: a. balance sheet b. income statement c. statement of cash flows d. statement of retained earnings e. two of the above

I also do not know what this means, so is there anyway you can generally explain how to get to the answer and provide me with the answer so i can know that I am doing each problem correctly (basically I want to know if I am using the correct table, I already know to do the eqution, I just use the wrong table.)

Provide the Answer and write the factor utilized to compute the following answers:

Lottery is won. You will receive $10,000 per year for 15 years starting at the end of the year. What is the present value?

You are depositing $5,000 per year for 8 years and will be earning 5% interest. What will be the value?

A one-Âtime gift of $25k will be received in 10 years. It will be earning 3%. What is it worth now?

The amount of risk involved is linked to the expected return?

Which Time Value chart would you utilize so solve the following problem:

You won the lottery and chose to receive 10 payments with the first payment due to you at the end of the period. What chart would you use to determine the value of those payments now? Write the title of the chart.

A. PV of $1

B. FV of $1

C. PV of a $1 Ordinary Annuity

D. FV of a $1 Ordinary Annuity

Calcin Jacobs is a widower who recently retired after a long career with a major Midwestern manufacturer. Beginning as a skilled craftsman, he worked his way up to the level of shop supervisor over a period of more than 30 years with the firm. Calvin receives social security benifits and a generous company pension. Together, these two sources amount to over $4,500 per month (part of which is tax-free). The Jacobses had no children, so he lives alone. Calvin owns a 2-bedroom rental house that is next to his home, and the rental income from it covers the mortgage payments for both the rental house and his house.

Over the years, Calvin and his late wife, Allie always tried to put a little money aside each month. The results have been nothing short of phenomenal. The value of calvins liquid investments (all held in bank CDs and savingd accounts) runs well into the 6 figures. Up to now, Calvin has just let his money grow and has not used any of his savings to supplement his Social Security, pension, and rental income. But things are about to change. Calvin has decided, "What the heck, it's time I start living the good life!" Calvin wants to travel and, in effect, start reaping the benifits of his labors. He has therefore decided to move $100,000 from a savings accounts to 1 or 2 high-yielding mutual funds. He would like to receive $1,000 to $1,500 a month from the fund(s) for as long as possible because he plans to be around for a long time.

a. Given Calvin's financial resourced and investment objectives, what kinds of mutual funds do you think he should consider?

b. What factors in Calvin's situation should be taken into consideration in the fund selection process? How might these affect Calvin's course of action?

c. What types of services do you think he should look for in a mutual fund?

d. Assume Calvin invests in a mutual fund that earns about 10% annually from dividend income and capital gains. Given that Calvin wants to receive $1,000 to $1,500 a month from his mutual fund, what would be the size of his investment account 5 years from now? How large would the account be if the fund earned 15% on average and everything else remained the same? How important is the fund's rate of return to Calvin's investment situation?

FIN 502 Chapter Notes - Chapter 3 and 4: Current Liability, Personal Finance, Income Statement

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