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Questions and Answers of
Corporate Finance
What are the pros and cons of adding $100 a month to your fixed-rate mortgage payment?
Use Worksheet 5.4. Miao Tian purchased a condominium four years ago for $180,000, paying $1,250 per month on her $162,000, 8 percent, 25-year mortgage. The current loan balance is $152,401. Recently,
How much would you have to put down on a house costing $100,000 if the house had an appraised value of $105,000 and the lender required an 80 percent loan-to-value ratio?
Explain how the composition of the principal and interest components of a fixed-rate mortgage changes over the life of the mortgage. What are the implications of this change?
1. How much would the Meyers have to put down if the lender required a minimum 20 percent down payment? Could they afford it?2. Given that the Meyers want to put only $25,000 down, how much would
1. Given the information provided, use Worksheet 5.2 to evaluate and compare Sophia’s alternatives of remaining in the apartment or purchasing the condo.2. Working with a friend who is a realtor,
1. What are some basic purchasing guidelines that the Harrisons should consider when choosing which new car to buy or lease? How can they find the information they need?2. How would you advise the
Why do people borrow? What are some improper uses of credit?
Describe the effects of the credit crisis of 2008–2009 on borrowers.
What steps can you take to establish a good credit rating?
What is open account credit? Name several different types of open account credit.
How the interest rate is typically set on bank credit cards?
Many bank card issuers impose different types of fees; briefly describe three of these fees.
What is a debit card? How is it similar to a credit card? How does it differ?
What are the basic features of a home equity credit line?
Describe credit scoring and explain how it’s used (by lenders) in making a credit decision.
Describe the basic operations and functions of a credit bureau.
What are some key factors that you should consider when choosing a credit card?
Discuss the steps that you would take to avoid and/or resolve credit problems.
What’s the biggest source of credit card fraud? List at least five things you can do to reduce your chances of being a victim of credit card fraud.
Distinguish between a Wage Earner Plan and straight bankruptcy.
What is the attraction of reward cards?
What is the most common method used to compute finance charges?
The monthly statement is a key feature of bank and retail credit cards. What does this statement typically disclose?
After graduating from college last fall, Jessica Stevens took a job as a consumer credit analyst at a local bank. From her work reviewing credit applications, she realizes that she should begin
Calculate your own debt safety ratio. What does it tell you about your current credit situation and your debt capacity? Does this information indicate a need to make any changes in your credit use
Debora Acocella has an overdraft protection line. Assume that her October 2015 statement showed a latest (new) balance of $862. If the line had a minimum monthly payment requirement of 5 percent of
Gabriel Donleavy, a student at State College, has a balance of $380 on her retail charge card; if the store levies a finance charge of 21 percent per year, how much monthly interest will be added to
Lei sung was reviewing her credit card statement and noticed several charges that didn’t look familiar to her. Lei are unsure whether she should pay the bill in full and forget about the unfamiliar
Explain how the financial crisis of 2008–2009 affected borrowers. Does this have any implications for how you should approach borrowing decisions?
Robert Denby has a monthly take-home pay of $1,685; he makes payments of $410 a month on his outstanding consumer credit (excluding the mortgage on his home). How would you characterize Robert’s
Use Worksheet 6.1. Rebecca Collins is evaluating her debt safety ratio. Her monthly take-home pay is $3,320. Each month, she pays $380 for an auto loan, $120 on a personal line of credit, $60 on a
David and Joan Mead have a home with an appraised value of $180,000 and a mortgage balance of only $90,000. Given that an S&L is willing to lend money at a loan-to-value ratio of 75 percent, how big
Isaac Primack recently graduated from college and is evaluating two credit cards. Card A has an annual fee of $75 and an interest rate of 9 percent. Card B has no annual fee and an interest rate of
Janine Waite has several credit cards, on which she is carrying a total current balance of $14,500. She is considering transferring this balance to a new card issued by a local bank. The bank
Joel Bastos recently received his monthly MasterCard bill for the period June 1–30, 2015, and wants to verify the monthly finance charge calculation, which is assessed at a rate of 15 percent per
William Holland is trying to decide whether to apply for a credit card or a debit card. He has $8,500 in a savings account at the bank and spends his money frugally. What advice would you have for
Harvey Singer recently graduated from college and wants to borrow $50,000 to start a business, which he believes will produce a cash flow of at least $10,000 per year. As a student, Harvey was active
1. In addition to opening checking and savings accounts, what else might Nancy do to begin establishing credit with a bank?2. Although Nancy is unlikely to be able to obtain a major bank credit card
1. Advise the Morales on how to fill out a credit application.2. Explain to them the procedure that the bank will probably follow in processing their application.3. Tell them about credit scoring and
List and briefly discuss the five major reasons for borrowing money through a consumer loan.
Identify several different types of federally sponsored student loan programs.
As a college student, what aspects of these student loan programs appeal to you the most?
Explain some strategies for reducing the cost of student loans.
Define and differentiate between(a) Fixed- and variable-rate loans(b) A single-payment loan and an installment loan.
Compare the consumer lending activities of(a) Consumer finance companies(b) Sales finance companies.Describe a captive finance company.
Discuss the role in consumer lending of(a) Credit unions(b) Savings and loan associations.Point out any similarities or differences in their lending activities. How do they compare with commercial
List and briefly discuss the different factors to consider when shopping for a loan. How would you determine the total cost of the transaction?
Describe the two methods used to calculate the finance charges on a single payment loan. As a borrower, which method would you prefer? Explain.
Briefly describe the basic features of an installment loan.
What is a home equity loan, and what are its major advantages and disadvantages?
Explain why a borrower is often required to purchase credit life and disability insurance as a condition of receiving an installment loan.
Define simple interest as it relates to an installment loan. Are you better off with add-on interest? Explain.
When does it make more sense to pay cash for a big-ticket item than to borrow the money to finance the purchase?
What two questions should be answered before taking out a consumer loan? Explain.
Bridget Morrow is a sophomore at State College and is running out of money. Wanting to continue her education, Bridget is considering a student loan. Explain her options. How can she minimize her
Assume that you’ve been shopping for a new car and intend to finance part of it through an installment loan. The car you’re looking for has a sticker price of $18,000. Auto Boss has offered to
Use Worksheet 7.1. Every six months, Brad Stengel takes an inventory of the consumer debts that he has outstanding. His latest tally shows that he still owes $4,000 on a home improvement loan
Kevin Hams plans to borrow $8,000 for five years. The loan will be repaid with a single payment after five years, and the interest on the loan will be computed using the simple interest method at an
Using the simple interest method, find the monthly payments on a $3,000 installment loan if the funds are borrowed for 24 months at an annual interest rate of 6 percent. How much interest will be
Find the finance charges on a 6.5 percent, 18-month, single-payment loan when interest is computed using the simple interest method. Find the finance charges on the same loan when interest is
Kristin Simon needs to borrow $4,000. First State Bank will lend her the money for 12 months through a single-payment loan at 8 percent, discount; Home Savings and Loan will make her a $4,000,
Todd Kowalski is borrowing $10,000 for five years at 7 percent. Payments are made on a monthly basis, which are determined using the add-on method.a. How much total interest will Todd pay on the loan
After careful comparison shopping, Dustin Creamer decides to buy a new Toyota Camry. With some options added, the car has a price of $23,558—including plates and taxes. Because he can’t afford to
Jack Colsen wants to buy a new high-end audio system for his car. The system is being sold by two dealers in town, both of whom sell the equipment for the same price of $2,000. Jack can buy the
Patricia Fox plans to borrow $5,000 and to repay it in 36 monthly installments. This loan is being made at an annual add-on interest rate of 7.5 percent.a. Calculate the finance charge on this loan,
Use Worksheet 7.2. Constance Botin wants to buy a home entertainment center. Complete with a big-screen TV, DVD, and sound system, the unit would cost $4,500. Constance has over $15,000 in a money
Because of a job change, Charles Wallace has just relocated to the southeastern United States. He sold his furniture before he moved, so he’s now shopping for new furnishings. At a local furniture
Assuming that interest is the only finance charge, how much interest would be paid on a $5,000 installment loan to be repaid in 36 monthly installments of $166.10? What is the APR on this loan?
1. How much would Anita(a) Receive in initial loan proceeds(b) Be required to repay at maturity under the North Carolina State Bank loan?2. Compute(a) The finance charges(b) The APR on the loan
1. Using Exhibit 7.5 or a financial calculator, determine the required monthly payments if the loan is taken out at First National Bank of Charlottesville.2. Compute(a) The finance charges(b) The APR
Discuss the role that insurance plays in the financial planning process. Why is it important to have enough life insurance?
Define(a) Risk avoidance(b) Loss prevention(c) Loss control(d) Risk assumption(e) An insurance policy.Explain their interrelationships.
Discuss some benefits of life insurance in addition to protecting family members financially after the primary wage earners death.
Explain the circumstances under which a single college graduate would or would not need life insurance. What life-cycle events would change this initial evaluation, and how might they affect the
Discuss the two most commonly used ways to determine a person’s life insurance needs.
Name and explain the most common financial resources needed after the death of a family breadwinner.
What is term life insurance? Describe some common types of term life insurance policies.
What are the advantages and disadvantages of term life insurance?
Explain how whole life insurance offers financial protection to an individual throughout his or her life.
Explain how the “paid-up insurance” component of a whole life insurance policy works.
Describe the different types of whole life policies. What are the advantages and disadvantages of whole life insurance?
What is universal life insurance? Explain how it differs from whole life and variable life insurance.
Explain how group life insurance differs from standard term life insurance. What do employees stand to gain from group life?
Why should the following types of life insurance contracts be avoided?(a) Credit life insurance(b) Mortgage life insurance(c) Industrial life insurance (home ser-vice life insurance).
Briefly describe the steps to take when you shop for and buy life insurance.
Briefly describe the insurance company ratings assigned by A. M. Best, Moody’s, Fitch, and Standard & Poor’s. Why is it important to know how a company is rated? What ratings would you look for
What characteristics would be most important to you when choosing an insurance agent?
What is a beneficiary? A contingent beneficiary? Explain why it’s essential to designate a beneficiary for your policy.
Explain the basic settlement options available for the payment of life insurance proceeds upon a person’s death.
What do non-forfeiture options accomplish? Differentiate between paid-up insurance and extended term insurance.
Explain the following clauses often found in life insurance policies:(a) Multiple indemnity clausesb) Disability clause(c) Suicide clause.Give some examples of common exclusions.
Describe what is meant by a participating policy, and explain the role of policy dividends in these policies.
Describe the key elements of an insurance policy illustration and explain what a prospective client should focus on in evaluating an illustration.
Explain the purpose of underwriting. What are some factors that underwriters consider when evaluating a life insurance application?
What are some factors that underwriters consider when evaluating a life insurance application? Which, if any, apply to you or your family members?
Use Worksheet 8.1. Rachel Ehrlich is a 72-year-old widow who has recently been diagnosed with Alzheimer’s disease. She has limited financial assets of her own and has been living with her daughter
Use Worksheet 8.1. Adam Modine, 43, is a recently divorced father of two children, ages 9 and 7. He currently earns $95,000 a year as an operations manager for a utility company. The divorce
Using the premium schedules provided in Exhibits. How much in annual premiums would a 25-year-old male have to pay for $100,000 of annual renewable term, level premium term, and whole life insurance?
Lilia and Mateo Navarrete are a dual-career couples who just had their first child. Mateo, age 29, already has a group life insurance policy, but Lilia’s employer does not offer life insurance. A
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