Show-your-work problem: Please, circle/box your final answer.

Question 1 (15 points)

1. (i) You want $100,000 after eight years in order to start a business. Currently you have $26,000, which may be invested to earn 7 percent annually. How much additional money must you set aside each year if these funds also earn 7 percent in order to meet your goal of $100,000 at the end of eight years? By how much would your answer differ if you invested the additional funds at the beginning of each year instead of at the end of each year? (7.5 points)

1. (ii) You are promised $10,000 a year for six years after which you will receive $5,000 a year for six years. If you can earn 8 percent annually, what is the present value of this stream of payments? (7.5 points)

Question 2 (20 points)

2. (i) Your stockbroker told you about buying stocks on margin last year. You were NOT sure if it is a good investment decision to buy stocks on borrowed funds at the time. You decided to give using margin a try anyway. Your stockbroker bought 100 shares of ABC Corp. on margin for $65 a share. The margin requirement was 60 percent with an interest rate of 6.5 percent on borrowed funds, and commissions on the purchase and sale were 2%. One year after you invested in the stock ABC corp. paid annual dividend of $2 a share and the price of the stock rose to $110 in one year. (12 points)

a. What is the percentage earned on the investment if the stock is bought for cash (i.e., the investor did not use margin)?

b. What is the percentage earned on the investment if the stock is bought on margin?

2 (ii). An investor sells 100 shares short at $22. The sale requires a margin deposit equal to 60 percent of the proceeds of the sale. (8 points)

1. If the investor closes the position at $30, what was the percentage earned or lost on the investment?

2. If the position had been closed when the price of the stock was $17, what would have been the percent earned or lost on the position?

Question 3 (20 Points)

3 (i) What is the federal income tax owed by an investor in the 35 percent income tax bracket? The tax rate on long-term capital gains is 15 percent. a. Megan sold Stock A for a short-term capital gain of $5,500; sold Stock B for a short-term capital loss of $2,100.

b. Margaret sold Stock A for a short-term capital loss of $2,000; sold Stock B for a short-term capital gain of $4,000.

c. Melissa is 70 years old and withdraws $1,000 from her Roth IRA account. Would the answer be different if she were 65 years old? d. Morgan bought 100 shares of IBM in March for $100 a share and sold the shares in April for $110.

e. Murphy contributed $4,000 to an IRA and used the proceeds to purchase stock A for $4,000. The stock was subsequently sold for $4,500 after a year had passed.

3 (ii) You have XYZ stock in your Keogh pension plan account. You bought the stock for $8,500 10 years ago when you were 50 years old. and the stock is now worth $14,500. You are in the 32 percent income tax bracket and pay 15 percent on long-term capital gains.

a) What was the annual rate of growth in the value of the stock?

b) Are you going to save or owe taxes if you decide to sell the stock? What are the taxes owed or saved if you withdraw the funds?

Question 4 (15 points)

4 (a). You contribute $5,500 to your traditional IRA every year for 20 and earn 8 percent annually. If you are in the 24 percent income tax bracket, what will be your annual tax obligation when you withdraw the funds for the next 15 years if your funds continue to earn 8 percent?

4 (b). A widower currently has $107,500 yielding 8 percent annually. Can he withdraw $18,234 a year for the next 10 years? If he cannot, what return must he earn in order to withdraw $18,234 annually?

Show-your-work problem: Please, circle/box your final answer.

Question 1 (15 points)

1. (i) You want $100,000 after eight years in order to start a business. Currently you have $26,000, which may be invested to earn 7 percent annually. How much additional money must you set aside each year if these funds also earn 7 percent in order to meet your goal of $100,000 at the end of eight years? By how much would your answer differ if you invested the additional funds at the beginning of each year instead of at the end of each year? (7.5 points)

1. (ii) You are promised $10,000 a year for six years after which you will receive $5,000 a year for six years. If you can earn 8 percent annually, what is the present value of this stream of payments? (7.5 points)

Question 2 (20 points)

2. (i) Your stockbroker told you about buying stocks on margin last year. You were NOT sure if it is a good investment decision to buy stocks on borrowed funds at the time. You decided to give using margin a try anyway. Your stockbroker bought 100 shares of ABC Corp. on margin for $65 a share. The margin requirement was 60 percent with an interest rate of 6.5 percent on borrowed funds, and commissions on the purchase and sale were 2%. One year after you invested in the stock ABC corp. paid annual dividend of $2 a share and the price of the stock rose to $110 in one year. (12 points)

a. What is the percentage earned on the investment if the stock is bought for cash (i.e., the investor did not use margin)?

b. What is the percentage earned on the investment if the stock is bought on margin?

2 (ii). An investor sells 100 shares short at $22. The sale requires a margin deposit equal to 60 percent of the proceeds of the sale. (8 points)

1. If the investor closes the position at $30, what was the percentage earned or lost on the investment?

2. If the position had been closed when the price of the stock was $17, what would have been the percent earned or lost on the position?

Question 3 (20 Points)

3 (i) What is the federal income tax owed by an investor in the 35 percent income tax bracket? The tax rate on long-term capital gains is 15 percent. a. Megan sold Stock A for a short-term capital gain of $5,500; sold Stock B for a short-term capital loss of $2,100.

b. Margaret sold Stock A for a short-term capital loss of $2,000; sold Stock B for a short-term capital gain of $4,000.

c. Melissa is 70 years old and withdraws $1,000 from her Roth IRA account. Would the answer be different if she were 65 years old? d. Morgan bought 100 shares of IBM in March for $100 a share and sold the shares in April for $110.

e. Murphy contributed $4,000 to an IRA and used the proceeds to purchase stock A for $4,000. The stock was subsequently sold for $4,500 after a year had passed.

3 (ii) You have XYZ stock in your Keogh pension plan account. You bought the stock for $8,500 10 years ago when you were 50 years old. and the stock is now worth $14,500. You are in the 32 percent income tax bracket and pay 15 percent on long-term capital gains.

a) What was the annual rate of growth in the value of the stock?

b) Are you going to save or owe taxes if you decide to sell the stock? What are the taxes owed or saved if you withdraw the funds?

Question 4 (15 points)

4 (a). You contribute $5,500 to your traditional IRA every year for 20 and earn 8 percent annually. If you are in the 24 percent income tax bracket, what will be your annual tax obligation when you withdraw the funds for the next 15 years if your funds continue to earn 8 percent?

4 (b). A widower currently has $107,500 yielding 8 percent annually. Can he withdraw $18,234 a year for the next 10 years? If he cannot, what return must he earn in order to withdraw $18,234 annually?