Scenario 15.5: Consider the Following Information Based on a Story by Hubert

question 98

Multiple Choice

Scenario 15.5:
Consider the following information based on a story by Hubert B. Herring that appeared in The New York Times on Catherine has a two-pack-a-day cigarette habit. Cigarettes cost about $2 per pack. Catherine is 20. On a $250,000 life insurance policy, her annual premiums are $1200; a non-smoker's would be $500. Smokers earn from 4 to 8 percent less in income than non-smokers (lower productivity and more absence, among other things) . In this case Catherine's income is expected to be $20,500 per year over her lifetime whereas $22,000 is an average non-smoker's salary. Let interest rates are expected to be 3%.
-Refer to Scenario 15.5. What is the total amount Catherine will lose in earnings by being a smoker, if she works now and continues until age 65?

• A) $1500
• B) $67,500
• C) $90,000
• D) $97,500
• E) $120,000

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Definitions:

Acquisition Differential

The difference between the purchase price of an acquired company and the book value of its net assets.

Acquisition Differential

The difference between the cost of the acquisition and the fair value of the net assets acquired in a business combination.

Equity Method

An accounting technique used by a company to record its investment in another company when it has significant influence but not full control.

Unamortized

Describes a portion of a loan or bond or other asset that has not yet been written off or paid down through periodic payments.