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Name: ________________________ Class: ___________________ Date: __________
ID: A
1
Fall 2006 BUSA307  Final Exam Part 2
Problem
1.
Sungho is married, files a joint return, and expects to be in the 35% marginal tax bracket for the foreseeable
future. All of his income is from salary and all of it is used to maintain the household. He has a paidup life
insurance policy with a cash surrender value of $50,000. He paid $24,000 of premiums on the policy. If he
retains the policy, the insurance company will pay him $2,500 (5%) interest each year. Sungho thinks he can
earn a higher return if he cashes in the policy and invests the proceeds.
a.
What beforetax rate of return would Sungho be required to earn on the proceeds from
cashing in the policy to equal the return earned with the insurance company?
b.
Assume Sungho estimates he can earn an 7% beforetax rate of return on the proceeds from
cashing in the policy. Assume he can earn an 7% return for the remainder of his life and that
he will reinvest all earnings at the same 7% beforetax rate of return. If Sungho expects to
live 10 more years, which alternative will yield the greater amount to his beneficiaries upon
Sungho’s death? (Given: The future value of an annuity in 10 years assuming a 4.55%
return is 12.32. The future value of an annuity in 10 years assuming a 3.25% return is
11.60).
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 Spring '09
 Korn

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