Financial Planning Exam Questions and
Answers Graded A+
opportunity cost - Correct answer-the value of the next best alternative that must be
forgone
ex: suppose instead of reading my textbook, I instead go to the movies, but I
mainly wanted to sleep.
the lost benefit of that sleep -- the next best alternative-- is the opportunity cost
when I choose to read.
marginal tax rate - Correct answer-tax rate that your last earned dollar is taxed
marginal tax rate equation - Correct answer-if Juanita Martinez has a taxable
income of $66,000 and
receives a $1000 bonus from her employer, she has to pay an extra $250 in taxes
on the
bonus income ($1000 X 0.25= $250). Juanita also has to pay state income taxes of
6 percent, or $60 ($1000 X 0.06 = $60), and Social Security taxes of 7.65 percent,
or
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,$76.50 ($1000 X 0.0765= $76.50). Therefore, Juanita pays an effective marginal
tax rate of nearly 40 percent (25% + 6% + 7.65% = 38.65%), or $386.50, on the
extra
$1000 of earned income.
so, (extra income X marginal tax rate = tax payable from your extra income)
marginal utility - Correct answer-extra satisfaction derived from gaining one more
incremental unit of a product or service
marginal cost - Correct answer-additional (marginal) cost of one more
incrememnetal unit of some item
* this should be compared with marginal utility to ensure you are comparing only
the most important variables
*marginal utility should exceed marginal cost*
tax sheltered income - Correct answer-Income exempt from income taxes in
the current year but that will be subject to taxation in a later tax year.
*gives one the opportunity to invest that money and make more off of it before
having to pay the deferred money*
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, time value of money - Correct answer-the cost of money that is borrowed or lent
- commonly referred to as interest
- adjust for the fact that dollars to be received or paid out in the future are not
equivalent to those received or paid out today
- It is easy to understand
that a dollar received today is worth more than a dollar received five years from
now because today's dollar can be saved or invested and earn some kind of return,
such as interest, so that in five years you expect it to be worth more than a dollar.
- 2 components: future value (compounding) and present value (discounting)
discounting - Correct answer-how much has to be put away today to provide some
dollar amount in the future?
this question asks for a present value, which is referred to as _____
compounding - Correct answer-the addition of interest to a principal
- serves as the basis of all time value of money considerations
principal - Correct answer-the original dollar amount invested
Simple interest - Correct answer-one way of calculating interest
1) principal (original amount invested)
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Answers Graded A+
opportunity cost - Correct answer-the value of the next best alternative that must be
forgone
ex: suppose instead of reading my textbook, I instead go to the movies, but I
mainly wanted to sleep.
the lost benefit of that sleep -- the next best alternative-- is the opportunity cost
when I choose to read.
marginal tax rate - Correct answer-tax rate that your last earned dollar is taxed
marginal tax rate equation - Correct answer-if Juanita Martinez has a taxable
income of $66,000 and
receives a $1000 bonus from her employer, she has to pay an extra $250 in taxes
on the
bonus income ($1000 X 0.25= $250). Juanita also has to pay state income taxes of
6 percent, or $60 ($1000 X 0.06 = $60), and Social Security taxes of 7.65 percent,
or
©COPYRIGHT 2025, ALL RIGHTS RESERVED 1
,$76.50 ($1000 X 0.0765= $76.50). Therefore, Juanita pays an effective marginal
tax rate of nearly 40 percent (25% + 6% + 7.65% = 38.65%), or $386.50, on the
extra
$1000 of earned income.
so, (extra income X marginal tax rate = tax payable from your extra income)
marginal utility - Correct answer-extra satisfaction derived from gaining one more
incremental unit of a product or service
marginal cost - Correct answer-additional (marginal) cost of one more
incrememnetal unit of some item
* this should be compared with marginal utility to ensure you are comparing only
the most important variables
*marginal utility should exceed marginal cost*
tax sheltered income - Correct answer-Income exempt from income taxes in
the current year but that will be subject to taxation in a later tax year.
*gives one the opportunity to invest that money and make more off of it before
having to pay the deferred money*
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, time value of money - Correct answer-the cost of money that is borrowed or lent
- commonly referred to as interest
- adjust for the fact that dollars to be received or paid out in the future are not
equivalent to those received or paid out today
- It is easy to understand
that a dollar received today is worth more than a dollar received five years from
now because today's dollar can be saved or invested and earn some kind of return,
such as interest, so that in five years you expect it to be worth more than a dollar.
- 2 components: future value (compounding) and present value (discounting)
discounting - Correct answer-how much has to be put away today to provide some
dollar amount in the future?
this question asks for a present value, which is referred to as _____
compounding - Correct answer-the addition of interest to a principal
- serves as the basis of all time value of money considerations
principal - Correct answer-the original dollar amount invested
Simple interest - Correct answer-one way of calculating interest
1) principal (original amount invested)
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