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Questions and Answers of
Corporate Finance
What information will you need to supply when applying for credit? What kinds of attributes are creditors looking for? Do you need to have all these attributes to get credit?
Describe some of the key provisions of the Credit CARD Act.
Describe the role of the Bureau of Consumer Financial Protection.
Describe the differences between a credit card like MasterCard or Visa and a retail ( or proprietary) card. How do credit and retail cards generate revenue? What is the biggest disadvantage of a
What is a credit limit? How can you increase your credit limit?
Discuss how credit cards offer incentives to use the cards. How else might credit card companies reward cardholders with excellent credit ratings?
What is a grace period? How can you use it to your advantage?
When is a finance charge applied to credit purchases? What is the common range of interest rates on credit cards?
What is a cash advance? How are they commonly obtained? Discuss interest rates and grace periods with regard to cash advances.
You just borrowed $ 7,500 and are charged a simple interest rate of 8%. How much interest do you pay each year?
Jarrod has narrowed his choice to two credit cards that may meet his needs. Card A has an APR of 21%. Card B has an APR of 14%, but also charges a $ 25 annual fee. Jarrod will not pay off his balance
Paul’s credit card closes on the 9th of the month, and his payment is due on the 30th. If Paul purchases a stereo for $ 300 on June 12th, how many interest- free days will he have? When will he
Chrissy currently has a credit card that charges 15% interest. She usually carries a balance of about $ 500. What will her total annual interest be with her current card?
Margie has had a tough month. First, she had dental work that cost $ 700. Next, she had her car transmission rebuilt, which cost $ 1,400. She put both of these unexpected expenses on her credit card.
Troy has a credit card that charges 18% on outstanding balances and on cash advances. The closing date on the credit card is the first of each month. Last month Troy left a balance on his credit card
Eileen (from question7) wants a car that costs $ 12,000. How long would it have taken Eileen to save for the outright purchase of the car if she did not have any credit card debt and used the
Chen recently graduated from college and accepted a job in a new city. Furnishing his apartment has proven more costly than he anticipated. To assist him with making purchases, he applied for and
Compare the amount of interest that the Sampsons are earning on their savings and paying on their credit card debt by completing the following worksheet.
Advise the Sampsons on whether they should continue making minimum payments on their credit card or use money from their savings to pay off the credit balance.
Explain how the Sampsons’ credit card decisions are related to their budget.
Assuming that you could convince Brad to maintain checking, savings, and retirement accounts, discuss the pros and cons of various types of financial institutions where Brad could maintain his a.
If Brad’s stocks double in value over the next five years, what annual return would he realize? Based on his projected annualized return, would it be advisable to sell the stocks to pay off his
How would you address Brads reluctance to pay off his credit card balance? Show him what he could earn in five years if he paid it off and invested the interest saved at 6%.
Would your advice change if Brad were: a. 45 years old? b. 60 years old?
In talking to Brad, you mentioned the increasing threat of identity theft. Brad seems concerned and after asking him several questions, you determine the following: a. For convenience, Brad has his
List some possible sources of personal loans. What precautions should be taken with loans from family members or friends?
What is the purpose of the annual percentage rate measurement? Could lenders with the same interest rates report different APRs?
What is simple interest? What information is needed to compute it? What information is contained in a loan repayment schedule?
How are payments calculated under the add- on interest method?
Why are loan payments under the simple interest method usually lower than loan payments under the add- on interest method?
List the steps in buying a car. What financial criteria should be considered? Discuss each briefly.
Why is purchasing a new car online not as efficient as buying a new car at a dealership?
Describe some techniques that car salespeople might use in negotiating the price of the car. What should you be aware of at “no-haggle” dealerships?
What should be the first step in financing a purchase of a car? Aside from the interest rate, what two factors will have the largest impact on the size of your monthly payment?
What are the advantages and disadvantages of leasing a car? Give some advice for someone considering leasing.
Who extends student loans? What are the characteristics of student loans?
What is home equity? Describe how a home equity loan works.
Discuss the two ways financial institutions might define equity to set credit limits. What happens if you default on a home equity loan?
How are interest rates calculated for home equity loans? Why do borrowers prefer home equity loans to other loans?
Why may a weak economy cause your credit limit on your home equity loan to decline? Why may a strong economy cause your credit limit on your home equity loan to rise?
What does it mean if a loan is amortized? What do the loan payments represent?
What information must borrowers supply to lenders in the loan application process? Why is this information important to lenders?
What information is included in a loan contract? How is the amount of the loan determined?
Explain how collateral works. Do all loans have collateral? What is the relationship between collateral and interest rates?
Explain the difference between a 10% rate charged on a payday loan and a 10% rate charged by a bank on a personal loan.
What are your responsibilities if you cosign a loan? What are the potential con-sequences of failing to live up to your responsibilities as a cosigner?
Jack needs to borrow $ 1,000 for the next year. Bank South will give him the loan at 9%. SunCoast Bank will give him the loan at 7% with a $ 50 loan origination fee. First National will give him the
John and Cheryl just borrowed $ 30,000 on a home equity line of credit. The interest rate for the loan is 6.75% for the entire year, and they took out the loan on May1. John and Cheryl are in the 28%
Fritz and Helga work for a local manufacturing company. Since their marriage five years ago, they have been working extensive overtime, including Sundays and holidays. Fritz and Helga have
Beth has just borrowed $ 5,000 on a four- year loan at 8% simple interest. Complete the amortization table below for the first five months of the loan.
What if Beth had made the same loan as an add-on interest loan? How would her payments differ? Why is there a difference?
Tracy is borrowing $ 8,000 on a six- year, 11%, add- on interest loan. What will Tracy’s payments be?
After making the down payment, she will finance $ 15,500. Sharon is offered three maturities. On a four- year loan, Sharon will pay $ 371.17 per month. On a five- year loan, Sharon’s monthly
Refer to question 5. If Sharon had been able to afford the four- year loan, how much interest would she have saved compared to the five- year loan?In Question 5After making the down payment, she will
Bill wants to purchase a new car for $ 45,000. Bill has no savings, so he needs to finance the entire purchase amount. With no down payment, the interest rate on the loan is 13% and the maturity of
Mary and Marty are interested in obtaining a home equity loan. They purchased their house five years ago for $ 125,000 and it now has a market value of $ 156,000. Originally, Mary and Marty paid $
Refer to question 8. What will Mary and Marty’s credit limit be if the bank uses the market value of equity to determine their credit limit and will loan them 70% of the equity? In Question 8 Mary
Advise the Sampsons on possible loan maturities. Access an online loan payment calculator. Input information to determine the possible monthly car payments for a three- year (36- month) payment
Based on the information on finance payments that you retrieved from the loan payment Web site, advise the Sampsons on the best loan maturity for their needs.
What is your first task when considering buying a home? Why is this step important? How can a real estate broker help you?
Why does the value of a home depend on the demand for homes? What factors influence the demand for homes?
How do lenders protect their interest in a home? Describe two government-backed home loan programs.
What are closing costs? List and briefly describe the different closing costs you might incur when applying for a mortgage.
Describe the characteristics of a fixed- rate mortgage. Why do certain homeowners prefer a fixed- rate mortgage to an adjustable- rate mortgage?
What is an amortization table? What does each mortgage payment represent?
List the three things that determine the amount of the monthly mortgage payment. Explain how each affects the payment.
Discuss the characteristics of an adjustable- rate mortgage. What influences your choice of a fixed- or adjustable- rate mortgage?
What are the costs of renting a home?
Describe some of the costs of buying a home. Are there potential tax savings associated with buying a home?
Describe the features of graduated payment and balloon payment mortgages.
What are the two financial components you must consider before purchasing a home? Why should you consider them?
What is mortgage refinancing? Are there any disadvantages to refinancing?
Explain how a weak economy affects the values of homes.
Explain how stronger economic conditions affect the values of homes.
What should you consider when determining an affordable down payment and monthly mortgage payments?
How do price, convenience of the location, and maintenance affect your home-buying decisions?
Why is the reputation of the school system in the area of the home you are buying important?
Why do insurance costs and taxes vary among homes?
What is the main factor in determining a home’s resale value? How can you predict a home’s resale value? Who pays commissions when a home is sold?
Once you have reduced your list of three or four homes down to one home, what is your next step? Should you offer the price the seller is asking? Describe how you would conduct a market analysis of
Dorothy and Matt are ready to purchase their first home. Their current monthly cash inflows are $ 4,900, and their current monthly cash outflows are $ 3,650. Their rent makes up $ 650 of their
If the cost of refinancing their house is $ 3,860, how long would Doug and Lynn have to remain in their home in order to recover the cost? (Ignore any interest on the savings in answering this
Paul wants to purchase his own home. He currently lives in an apartment, and his rent is being paid by his parents. Paul’s parents have informed him that they would not pay his mortgage payments.
Paul will be able to save $ 400 per month (which can be used for mortgage payments) for the indefinite future. If Paul finances the remaining cost of the home (after making the $ 20,000 down payment)
Mia would like to purchase a specific home and knows that she can afford the home, but her income is slightly lower than the amount needed to qualify for the mortgage. She is a waitress and makes
Denise and Kenny are ready to make an offer on an 1,800- square- foot home that is priced at $ 135,000. They investigate other homes on lots of similar size and find the following information: • A
Larry and Laurie have found a home and made a $ 125,000 offer that has been accepted. They make a down payment of 10%. Their bank charges a loan origination fee of 1% of the loan and points of 1.5%
Lloyd and Jean are considering purchasing a home requiring a $ 75,000 mortgage. The payment on a 30- year mortgage for this amount is $ 498.97. The payment for a 15- year maturity is $ 674.12. What
This month you made a mortgage payment of $ 700, of which $ 600 was an interest payment and $ 100 a payment of the loan principal. You are in the 25% marginal tax bracket. What is the tax savings as
Teresa rents her apartment for $ 650 per month, utilities not included. When she moved in, she paid a $ 700 security deposit using money from her savings account that was paying 3% interest. Her
Matt has found a condominium in an area where he would enjoy living. He would need a $ 5,000 down payment from his savings and would have to pay closing costs of $ 2,500 to purchase the condo. His
Matt paid mort-gage interest of $ 4,330 during his first year in the condo. His property taxes were $ 600, and his homeowner’s insurance was $ 460. If Matt is in a 25% marginal tax rate bracket,
Doug and Lynn bought their home three years ago. They have a mortgage payment of $ 601.69. Interest rates have recently fallen, and they can lower their mortgage payments to $ 491.31 if they
Use a Web site or a financial calculator to determine the monthly mortgage payment (excluding property taxes and insurance) on a $ 90,000 mortgage if the Sampsons obtain a new 30- year mort-gage at
The Sampsons expect that they will not move for at least three years. Advise the Sampsons on whether they should refinance their mortgage by comparing the savings of refinancing with the costs.
Why might your advice about refinancing change in the future?
Refer to Brad€™s personal cash flow statement that you developed in Part 1. Re-compute his expenses to determine if Brad can afford toa. Purchase the new carb. Lease the new carc. Purchase the
Brad’s uncle has offered to provide him with a loan for the closing costs and the down payment needed to purchase the condo. Brad exclaims, “This is great. I don’t even need a loan contract!”
What are the advantages and disadvantages to Brad of leasing rather than purchasing the car?
Based on the information you provided, Brad decides not to buy the condo at this time. How can he save the necessary funds to purchase a condo or house in the future? Be specific in your
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