[FIN 401] - Final Exam Guide - Ultimate 26 pages long Study Guide!

NON-EXCEL help on Growing Annuity Problem

In this problem, we will assume all cash flows occur at theBEGINNING OF THE PERIOD (Annuity Due). Therefore,you need to set the calculator to BEGIN. You maywant to review the Lecture Video on Growing Annuity for help inworking the exam.

Problem:
Assume you are 32 years old and plan to retire in 35 years at age67. You are currently earning $75,000/year and expect averageannual salary increases of 4.0%/year over the next 35 years. Youhave $0 saved for retirement.

You are trying to determine how much money to save (invest) eachyear in your 401(k) Plan to fund your retirement in order to payyourself 70% of your final salary each year (that increases withinflation). [Remember this is an Annuity Due, so your first annualinvestment is made in Year 0….and your final payment is in Year34.] You plan to maintain an investment as a percent of yoursalary, which simply means your payment into the 401(k) will alsoincrease by 4.0% per year as your salary increases 4.0% eachyear.

You believe that you can earn 8.0%/year over the next 35 yearswhile saving for retirement.

Once you retire, you have a life expectancy of 25 years. Youplan to be more conservative in your investments and expect to earnonly 5.0%/year on your investments over the 25 years while inretirement. You also want to maintain your purchasing power byincreasing your “annual retirement pay” by the expected inflationrate of 3.0% each year. [Remember, your first withdrawal will bemade in Year 0 of retirement (i.e., Year 35 on the timeline.]Assume that after you withdraw the 25th payment, you will have $0left in the account.

Instructions:
- SET CALCULATOR TO “BEGIN”!
- Set up and show your Timeline with payments. You MUST “show yourwork” in order to get partial credit.
- For this Exam it would be better to handwork the problem and saveas a pdf before submitting.
- BOX in all your ANSWERS!
- You may round all answers to the dollar throughout theproblem.
- Carry your adjusted interest rates out to 6 decimal places toreduce rounding errors.

Questions: [NOTE: there are obviously many steps to get to theseanswers…scoring is below.]
1. What is your final year’s salary?
What is 70% of your salary? [Round to the dollar.]

2. How much will you need in your 401(k) at retirement in orderto “pay yourself” 70% of your final year’s salary,
AND have that payment to yourself increase at 3.0% each year tomaintain purchasing power?

3. How much do you need to contribute each year (i.e., save,invest) over the next 35 years in order to fund your retirement.Remember, payment into the 401(k) is increasing by 4.0% eachyear.

Scoring (Do not use Excel):

1. Readability of your Exam. Is it organized, do you show allwork, are your answers BOXED in, etc. (10 points)
2. Correctly work problem as an Annuity Due (10 points)
3. Calculate the FV of salary and 70% of salary as first withdrawalfrom your 401(k) in retirement. (15 points)
4. Do you show a Timeline and is it labeled properly? (15points)
5. Calculate adjusted interest rate for Retirement Annuity section.(10 points)
6. Calculate the PVA for the Retirement Annuity. (10 points)
7. Calculate the adjusted interest rate for the saving/investingsection of problem. (10 points)
8. Calculate the adjusted FVA correctly that is used to determineamount to save each year. (10 points)
9. Calculate the amount you need to save each year; where paymentincreases as salary increases. (10 points)

Mary and Harry Reser, 57 and 62, are looking ahead to retirement early next year. They are thinking about heading south to a cheaper and warmer state but haven't made a firm decision. Harry is the sole breadwinner and earns $64,543, plus an additional $8,169 from investments.

The Reser's two main concerns are longevity and taxes. "We want to take income from investments with the least amount of tax liability and make the money we have accrued last as long as we do," notes Harry. He also noted a concern about taking money out of tax-deferred plans in the correct manner to avoid IRS penalties.

The Reser's can be considered "millionaires next door," with an impressive net worth of $1,065,951. They have absolutely no debt and the following assets: $32,000 in a 2% bank passbook account, $347,365 in telephone stock; $224,901 in Harry's 401(k); $31,000 in an annuity; $202,685 in mutual funds; $23,000 in whole life insurance; their $190,000 home; and $15,000 of personal property.

No information was provided as to the type of mutual funds or the 401(k)'s asset allocation (i.e., the percentage of the account in different types of assets like stocks and bonds). Harry contributes 15% of his salary to the 401(k) and appears to have been doing this for many years. Neither spouse has an individual retirement account (IRA), however.

The Resers estimate that their monthly expenses total $1,500. The are concerned about the future cost of health care and note that, in retirement, "the biggest expense not in our current budget will be medical insurance." Currently, Harry shares part of the cost of health coverage with his employer but this coverage will end after he retires. His employer also provides short-term disability coverage and matches his 401(k) contribution up to the first 8% of pay.

The Reser's car and home have $500,000 and $300,000 of liability coverage, respectively. They do not own an umbrella liability policy. The Resers are thinking of tapping their $23,000 of life insurance cash value. "We do not feel that we need life insurance any longer," says Harry, "and will most likely cash them in."

Taxes were mentioned several times as a major concern. The Reser's taxable income is $50,543. If their adjusted gross income in retirement exceeds $44,000, 85% of their Social Security benefits will be taxed. Tax on Social Security is figured on what is known as "preliminary adjusted gross income." This figure includes all earnings, pensions, dividends and interest from investments, including tax-free municipal bonds, and half of a person's Social Security benefit.

The Resers do not have wills. They have no children and it is unclear who their heirs are.

1. Discuss the strengths and weaknesses of the Rese family's financial situation.

Their strength is their net worth of $1,065,951, their job contribute 8% of their 401k, they invest for the future and they have no debt.

Their weakness is that they can be penalize by the IRS, they have no kids so there’s no will and they have no future health insurance.

2. Comments about Reser family's cash flow.

4. Calculate the savings required to reach Reser family’s financial goals.

5. Recommend 3 to 5 action steps to improve Rese family's financial.

6. Recommended financial products such as bank accounts, insurance policies, and mutual funds for Rese’s family.

NIKE:

Need the following ratios to be calculated using the financial sheets copied at the bottom. Each ratio needs to be calculated using the information from 2016. Each ratio also needs to be broken down and illustrated by the step by step process. Finally, please include any and all observations for each ratio and analysis.

1) Common Size analysis

2) Common size vertical analysis & graph

3) Current Ratio

4) Quick Ratio

5) Cash Ratio

6) Inventory Turnover

7) Receivables Turnover

8) Total Asset Turnover

9) Fixed Asset Turnover

10) Gross profit margin

11) Operating Profit margin

12) Net profit margin

13) Return on total assets

14) return on equity

15) basic earning power

16) Deb/net worth ratio

17) debt ratio

18) DuPont System

19) Times-interest-earned

Balance Sheet:

Income Statement:

Cash Flow Sheet