PROBLEM CHAPTER 8

1. Most home insurance policies cover jewelry for $1,000 and silverware for $2,500 unless items are covered
with additional insurance. If $4,500 worth of jewelry and $6,000 worth of silverware were stolen from a family,
what amount of the claim would not be covered by insurance? (LO8.2)

2. What amount would a person with actual cash value (ACV) coverage receive for two-year-old furniture
destroyed by a fire? The furniture would cost $2,000 to replace today and had an estimated life of five years.
(LO8.2)

3. What would it cost an insurance company to replace a family’s personal property that originally cost $25,000?
The replacement costs for the items have increased 15 percent. (LO8.2)

4. If Carissa Dalton has a $130,000 home insured for $100,000, based on the 80 percent coinsurance provision,
how much would the insurance company pay on a $5,000 claim? (LO8.2)

5. For each of the following situations, what amount would the insurance company pay? (LO8.2)
a. Wind damage of $835; the insured has a $500 deductible.

b. Theft of a stereo system worth $1,150; the insured has a $250 deductible.

c. Vandalism that does $425 of damage to a home; the insured has a $500 deductible.
9. When Carolina’s house burned down, she lost household items worth a total of $50,000. Her house was
insured for $160,000 and her homeowner’s policy provided coverage for personal belongings up to 55 percent
of the insured value of the house. Calculate how much insurance coverage Carolina’s policy provides for her
personal possessions and whether she will receive payment for all of the items destroyed in the fire. (LO8.2)

10. Dave and Ellen are newly married and living in their first house. The yearly premium on their homeowner’s
insurance policy is $450 for the coverage they need. Their insurance company offers a 5 percent discount if they
install dead-bolt locks on all exterior doors. The couple can also receive a 2 percent discount if they install
smoke detectors on each floor. They have contacted a locksmith, who will provide and install dead-bolt locks
on the two exterior doors for $60 each. At the local hardware store, smoke detectors cost $8 each, and the new
house has two floors. Dave and Ellen can install them themselves. What discount will Dave and Ellen receive
if they install the dead-bolt locks? If they install smoke detectors? (LO8.2)

11. In the preceding example, assuming their insurance rates remain the same, how many years will it take Dave
and Ellen to earn back in discounts the cost of the dead-bolts? The cost of the smoke detectors? Would you
recommend Dave and Ellen invest in the safety items? Why or why not? (LO8.2)
PROBLEM CHAPTER 9
1. The Tucker family has health insurance coverage that pays 80 percent of out-of-hospital expenses after a
$500 deductible per person. If one family member has doctor and prescription medication expenses of $1,100,
what amount would the insurance company pay? (LO9.2)

2. A health insurance policy pays 65 percent of physical therapy costs after a $200 deductible. In contrast, an
HMO charges $15 per visit for physical therapy. How much would a person save with the HMO if he or she
had 10 physical therapy sessions costing $50 each? (LO9.2)

3. Becky’s comprehensive major medical health insurance plan at work has a deductible of $750. The policy
pays 85 percent of any amount above the deductible. While on a hiking trip, Becky contracted a rare bacterial
disease. Her medical costs for treatment, including medicines, tests, and a six-day hospital stay, totaled $8,893.
A friend told her that she would have paid less if she had a policy with a stop-loss feature that capped her out-
of-pocket expenses at $3,000. Was her friend correct? Show your computations. Then determine which policy
would have cost Becky less and by how much. (LO9.2)

5. Stephanie was injured in a car accident and was rushed to the emergency room. She received stitches for a
facial wound and treatment for a broken finger. Under Stephanie’s PPO plan, emergency room care at a network
hospital is 80 percent covered after the member has met a $300 annual deductible. Assume that Stephanie went
to a hospital within her PPO network. Her total emergency room bill was $850. What amount did Stephanie
have to pay? What amount did the PPO cover? (LO9.2)
Questions 6, 7, and 8 are based on the following scenario:
Ronald Roth started his new job as controller with Aerosystems today. Carole, the employee benefits clerk,
gave Ronald a packet that contains information on the company’s health insurance options. Aerosystems offers
its employees the choice between a private insurance company plan (Blue Cross/Blue Shield), an HMO, and a
PPO. Ronald needs to review the packet and make a decision on which health care program fits his needs. The
following is an overview of that information.
a. Blue Cross/Blue Shield plan: The monthly premium cost to Ronald will be $42.32. For all doctor office
visits, prescriptions, and major medical charges, Ronald will be responsible for 20 percent and the insurance
company will cover 80 percent of covered charges. The annual deductible is $500.
b. The HMO is provided to employees free of charge. The copayment for doctors’ office visits and major
medical charges is $10. Prescription copayments are $5. The HMO pays 100 percent after Ronald’s
copayment. No annual deductible.
 c. The POS requires that the employee pay $24.44 per month to supplement the cost of the program with the
company’s payment. If Ron uses health care providers within the plan, he pays the copayments as described
above for the HMO. He can also choose to use a health care provider out of the network and pay 20 percent
of all charges after he pays a $500 deductible. The POS will pay for 80 percent of those covered visits. No
annual deductible.
Ronald decided to review his medical bills from the previous year to see what costs he had incurred and to
help him evaluate his choices. He visited his general physician four times during the year at a cost of $125 for
each visit. He also spent $65 and $89 on prescriptions during the year. Using these costs as an example, what
would Ron pay for each of the plans described above? (For the purposes of the POS computation, assume that
Ron visited a physician outside of the network plan. Assume he had his prescriptions filled at a network-
approved pharmacy.)
6. What annual medical costs will Ronald pay using the sample medical expenses provided if he enrolls in the
Blue Cross/Blue Shield plan? (LO9.2)

7. What total costs will Ronald pay if he enrolls in the HMO plan? (LO9.2)

8. If Ronald selects the POS plan, what will his annual medical costs be? (LO9.2)

9. In 2005, Joelle spent $5,000 on her health care. If this amount increased by 6 percent per year, what would
be the amount Joelle spent in 2015 for the same health care? (Hint: Use the time value of money table in Chapter
1 Appendix, Exhibit 1–A.) (LO9.6)

10. As of 2012, per capita spending on health care in the United States was about $9,000. If this amount
increased by 7 percent a year, what would be the amount of per capita spending for health care in 8 years? (Hint:
Use the time value of money table in Chapter 1 Appendix, Exhibit 1–A.) (LO9.6)
PROBLEM CHAPTER 10
1. You are the wage earner in a “typical family,” with $40,000 gross annual income. Use the easy method to
determine how much insurance you should carry. (LO10.1)

2. You and your spouse are in good health and have reasonably secure careers. Each of you makes about $40,000
annually. You own a home with an $80,000 mortgage, and you owe $15,000 on car loans, $5,000 in personal
debts, and $4,000 on credit card loans. You have no other debts. You have no plans to increase the size of your
family in the near future. Estimate your total insurance needs using the DINK method. (LO10.1)

3. Shaan and Anita are married and have two children, ages 4 and 7. Anita is a “nonworking” spouse who
devotes all of her time to household activities. Estimate how much life insurance Shaan and Anita should carry.
(LO10.1)

4. Obtain premium rates for $50,000 whole life, universal life, and term life policies from local insurance agents.
Compare the costs and provisions of these policies. (LO10.2)

5. Use the “Figure It Out!” worksheet in this chapter to calculate your own life insurance needs. (LO10.1)

6. Use Exhibit 10–1 to find the average number of additional years a 25-year-old male and female are expected
to live, based on the statistics gathered by the U.S. government as of 2009. (LO10.1)

7. Mark and Parveen are the parents of three young children. Mark is a store manager in a local supermarket.
His gross salary is $75,000 per year. Parveen is a full-time stay-at-home mom. Use the easy method to estimate
the family’s life insurance needs. (LO10.1)
8. You are a dual-income, no-kids family. You and your spouse have the following debts (total): mortgage,
$200,000; auto loan, $10,000; credit card balance, $4,000; other debts, $10,000. Further, you estimate that your
funeral will cost $8,000. Your spouse expects to continue to work after your death. Using the DINK method,
what should be your need for life insurance? (LO10.1)

9. Using the “nonworking” spouse method, what should be the life insurance needs for a family whose youngest
child is 10 years old? (LO10.1)

10. Using the “nonworking” spouse method, what should be the life insurance needs for a family whose
youngest child is five years old? (LO10.1)

11. Your variable annuity charges administrative fees at an annual rate of 0.15 percent of account value. Your
average account value during the year is $200,000. What is the administrative fee for the year? (LO10.4)

12. Sophia purchased a variable annuity contract with $25,000 purchase payment. Surrender charges begin with
7 percent in the first year and decline by 1 percent each year. In addition, Sophia can withdraw 10 percent of
her contract value each year without paying surrender charges. In the first year, Sophia needed to withdraw
$6,000. Assume that the contract value had not increased or decreased because of investment performance.
What was the surrender charge Sophia had to pay? (LO10.4)

13. Shelly’s variable annuity has a mortality and expense risk charge at an annual rate of 1.25 percent of account
value. Her account value during the year is $50,000. What was Shelly’s mortality and expense risk charge for
the year? (LO10.4)
PROBLEM CHAPTER 12
1. Jamie and Peter Dawson own 220 shares of Duke Energy common stock. Duke Energy’s quarterly dividend
is $0.28 per share. What is the amount of the dividend check the Dawson couple will receive for this quarter?
(LO12.1)

2. During the four quarters for 2015, the Browns received two quarterly dividend payments of $0.18, one
quarterly payment of $0.20, and one quarterly payment of $0.22. If they owned 300 shares of stock, what was
their total dividend income for 2015? (LO12.1)

3. Jim Johansen noticed that a corporation he is considering investing in is about to pay a quarterly dividend.
The record date is Thursday, March 15. In order for Jim to receive this quarterly dividend, what is the last date
that he could purchase stock in this corporation and receive this quarter’s dividend payment? (LO12.1)

4. Sarah and James Hernandez purchased 140 shares of Macy’s stock at $57 a share. One year later, they sold
the stock for $61 a share. They paid a broker an $8 commission when they purchased the stock and a $12
commission when they sold the stock. During the 12-month period the couple owned the stock, Macy’s paid
dividends that totaled $1.00. Calculate the Hernandezes’ total return for this investment. (LO12.1)

5. Wanda Sotheby purchased 120 shares of Home Depot stock at $82 a share. One year later, she sold the stock
for $74 a share. She paid her broker a $34 commission when she purchased the stock and a $39 commission
when she sold it. During the 12 months she owned the stock, she received $188 in dividends. Calculate Wanda’s
total return on this investment. (LO12.1)

6. In September, the board of directors of Chaparral Steel approved a 2-for-1 stock split. After the split, how
many shares of Chaparral Steel stock will an investor have if he or she owned 400 shares before the split?
(LO12.1)
7. Michelle Townsend owns stock in National Computers. Based on information in its annual report, National
Computers reported after-tax earnings of $9,700,000 and has issued 7,000,000 shares of common stock. The
stock is currently selling for $32 a share. (LO12.3)
a. Calculate the earnings per share for National Computers.

b. Calculate the price-earnings (PE) ratio for National Computers.

8. Analysts that follow JPMorgan Chase, one of the nation’s largest providers of financial services, estimate
that the corporation’s earnings per share will increase from $5.56 in the current year to $6.12 next year. (LO12.3)
a. What is the amount of the increase?

b. What effect, if any, should this increase have on the value of the corporation’s stock?

9. Currently, Boeing pays an annual dividend of $2.92. If the stock is selling for $128, what is the dividend
yield? (LO12.3)

10. Ford Motor Company has a 1.35 beta. If the overall stock market increases by 6 percent, how much will
Ford change? (LO12.3)

11. Casper Energy Exploration reports that the corporation’s assets are valued at $185,000,000, its liabilities are
$80,000,000, and it has issued 6,000,000 shares of stock. What is the book value for a share of Casper stock?
(LO12.3)
12. For four years, Marty Campbell invested $4,000 each year in Harley-Davidson. The stock was selling for
$36 in 2011, $45 in 2012, $52 in 2013, and $70 in 2014. (LO12.5)
a. What is Marty’s total investment in Harley-Davidson?

b. After four years, how many shares does Marty own?

c. What is the average cost per share of Marty’s investment?

13. Bob Orleans invested $3,000 and borrowed $3,000 to purchase shares in Verizon Communications. At the
time of his investment, Verizon was selling for $45 a share. (LO12.5)
a. If Bob paid a $30 commission, how many shares could he buy if he used only his own money and did
not use margin?

b. If Bob paid a $60 commission, how many shares could he buy if he used his $3,000 and borrowed $3,000
on margin to buy Verizon stock?

c. Assuming Bob did use margin, paid a $60 total commission to buy his Verizon stock and another $60 to
sell his stock, and sold the stock for $52 a share, how much profit did he make on his Verizon stock
investment?

14. After researching Valero Energy common stock, Sandra Pearson is convinced the stock is overpriced. She
contacts her account executive and arranges to sell short 300 shares of Valero Energy. At the time of the sale, a
share of common stock had a value of $56. Three months later, Valero Energy is selling for $47 a share, and
Sandra instructs her broker to cover her short transaction. Total commissions to buy and sell the stock were $36.
What is her profit for this short transaction? (LO12.5)
PROBLEM CHAPTER 13
1. The Western Capital Growth mutual fund has: Total assets, $750,000,000. Total liabilities, $7,200,000. Total
number of shares, 24,000,000. What is the fund’s net asset value (NAV)? (LO13.1)

2. Jan Throng invested $31,000 in the Invesco Charter mutual fund. The fund charges a 5.50 percent commission
when shares are purchased. Calculate the amount of commission Jan must pay. (LO13.1)

3. As Bart Brownlee approached retirement, he decided the time had come to invest some of his nest egg in a
conservative fund. He chose the Franklin Utilities Fund. If he invests $46,000 and the fund charges a 4.25
percent load when shares are purchased, what is the amount of commission that Bart must pay? (LO13.1)

4. Mary Canfield purchased shares in the New Dimensions Global Growth Fund. This fund doesn’t charge a
front-end load, but it does charge a contingent deferred sales load of 4 percent for any withdrawals during the
first five years. If Mary withdraws $7,500 during the second year, how much is the contingent deferred sales
load? (LO13.1)

5. The value of Mike Jackson’s shares in the New Frontiers Technology Fund is $11,400. The management fee
for this particular fund is 0.80 percent of the total asset value. Calculate the management fee Mike must pay this
year. (LO13.1)

6. Betty and James Holloway invested $71,000 in the Financial Vision Social Responsibility Fund. The
management fee for this fund is 0.60 percent of the total asset value. Calculate the management fee the
Holloways must pay. (LO13.1)
7. As part of his 401(k) retirement plan at work, Ken Lowery invests 5 percent of his salary each month in the
Capital Investments Lifecycle Fund. At the end of this year, Ken’s 401(k) account has a dollar value of $36,400.
If the fund charges a 12b-1 fee of 0.75 percent, what is the amount of the fee? (LO13.1)

8. When Jill Thompson received a large settlement from an automobile accident, she chose to invest $146,000
in the Vanguard 500 Index Fund. This fund has an expense ratio of 0.17 percent. What is the amount of the fees
that Jill will pay this year? (LO13.1)

9. The Yamaha Aggressive Growth Fund has a 1.83 percent expense ratio. (LO13.1)
a. If you invest $55,000 in this fund, what is the dollar amount of fees that you would pay this year?

b. Based on the information in this chapter and your own research, is this a low, average, or high expense
ratio?

10. Jason Mathews purchased 300 shares of the Hodge & Mattox Energy Fund. Each share cost $14.15. Fifteen
months later, he decided to sell his shares when the share value reached $17.10. (LO13.4)
a. What was the amount of his total investment?

b. What was the total amount Mr. Mathews received when he sold his shares in the Hodge & Mattox fund?

c. How much profit did he make on his investment?

11. Three years ago, James Matheson bought 200 shares of a mutual fund for $23 a share. During the three-year
period, he received total income dividends of $0.92 per share. He also received total capital gain distributions
of $0.80 per share. At the end of three years, he sold his shares for $29 a share. What was his total return for
this investment? (LO13.4)
12. Assume that one year ago, you bought 120 shares of a mutual fund for $33 a share, you received a $0.60
per-share capital gain distribution during the past 12 months, and the market value of the fund is now $38 a
share. (LO13.4)
a. Calculate the total return for your $3,960 investment.

b. Calculate the percentage of total return for your $3,960 investment.

13. Over a four-year period, LaKeisha Thompson purchased shares in the Oakmark I Fund. Using the
following information, answer the questions that follow. You may want to review the concept of dollar cost
averaging in Chapter 12 before completing this problem. (LO13.4)

Year Investment Amount Price per Share Number of Shares*

February 2011 $1,500 $45.00
February 2012 $1,500 $43.00
February 2013 $1,500 $57.00
February 2014 $1,500 $65.00
*Carry your answer to two decimal places.

a. At the end of four years, what is the total amount invested?

b. At the end of four years, what is the total number of shares purchased?

c. At the end of four years, what is the average cost for each share?

14. During one three-month period, Matt Round top’s mutual fund grew by $6,000. If he withdraws 35
percent of the growth, how much will he receive? (LO13.4)