Sample Case Study (J)

Case Study - Pankaj Sen

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Today is 1 December, 2006. Mr. Pankaj Sen has approached you for construction of his
Financial Plan. His details are as follows:

Mr. Pankaj Sen is a Sr. Engineer with Public Works Department and posted in Kolkata, staying
with his family in his own house. He had a stable tenure with the same organization for the last 35
years. He will be completing 60 years on January 2007, when he will retire from his service.
During his employment, he had concentrated more on his work and less on his personal finances
and as he is now on the verge of his retirement, he does not have any idea about how to manage
his post retirement finances.

A diligent information gathering session with him yielded the following quantitative and qualitative
data.

Post Retirement Income

Pension: Rs 1,25,000/- p.a. (expected to increase @ 6% p.a.)

Pension from Life Insurance Company: Rs. 10200/- p.a. (fixed) for entire life.
An existing P.O. MIS: Rs. 4,800/- p.a. (maturing in June 2011).
Rental incomes, if any, from his houses in Kolkata & Siliguri.

Post Retirement Expenditure

Household expenses: Rs. 1,08,000/- p.a. (with 6% increase p.a.)

Daughter’s Educational Expenses: Rs. 12,500/- p.a. (Only for 1 year – then she will go for
Management Education)
Premium for Health Insurance: Rs. 3,000/- p.a. (Cover for family)
Life Insurance on daughter’s life: Rs. 6,900/- p.a.
EMI for Housing loan and other loans, if any.

Assets

House at Kolkata – Rs. 3,00,000/- (Cost Price in the year 1995).

House at Siliguri – Rs. 50,000/- (Cost Price in the year 1985, Fair Rental Value Rs. 24,000/- p.a.,
Municipal Value Rs. 25,200/- p.a., Actual Rent Rs. 22,000/- p.a., Standard Rent Rs. 24,000/-).
Bonds – Rs. 60,000/- (Redemption value - Maturity in Apr 2007)
PO MIS: Rs. 60,000/- (maturing in June 2011).
Other Investments including Life Insurance – Rs. 78,000/- (maturing in Feb 2007).
PPF- Rs. 81,000/- (maturing in 2010)
Retirement Proceeds: Rs. 9,50,000/- to be received in Feb 2007.

Liabilities
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Housing loan taken by Pankaj on 1 Jul 2003 for renovation of his house in Kolkata Rs.
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1,50,000/-, EMI Rs. 2630 being paid from 1 Aug 2003. Present interest being charged is 11%
p.a.
Daughter’s Management Education Expenses: Rs. 4,00,000/- (Year 2007 –2009).
Daughter’s Marriage Provision: Rs. 3,00,000/- (Year 2010).

Others

Pankaj wants to maintain Rs. 1,00,000/- in Cash for contingencies.

Both Pankaj and his wife possess good health. Post retirement they would maintain active life.
One of the retirement benefits of Pankaj includes a cover under the Central Government Health
Scheme for self and family.
Note:

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1. Housing loan interest rate at the inception was 8%, was 9% with effect from April 2004, 10%
with effect from June 2005 and 11% with effect from April 2006 on the outstanding balance
amount. The EMI is the same since inception.

2. The House at Siliguri is given on rent for the last two years.

3. Municipal Taxes paid on Kolkata house is Rs. 2,125/- and Siliguri house is Rs. 1,150/-.

Questions

1) While analyzing and evaluating Pankaj’s information in his Financial Planning

process which of the following tasks have you completed in this stage?
1. Identifying alternative investment vehicles.
2. Identifying financial strengths and weaknesses.
3. Recommending specific tax strategies.
4. Preparing preliminary financial statements. (2)
A. 2 and 4.
B. 1, 2 and 3.
C. 2, 3 and 4.
D. 1, 2, 3 and 4.

2) The estimated value of a real estate asset in the financial statement of Pankaj
prepared by you should be based upon the: (2)
A. Basis of the asset, after taking into account all straight-line and accelerated
depreciation.
B. Value that a well-informed buyer is willing to accept from a well-informed seller
where neither is compelled to buy or sell.
C. Current replacement value of the asset.
D. Pankaj’s estimate of current value.

3) Which of the following would affect Net Worth of Pankaj?

1. Repayment of a loan using funds from a savings account.
2. Purchase of an automobile that is 75% financed with a 25% down payment.
3. Increase in Nifty, and assuming Pankaj has a Nifty indexed Mutual Fund in his
portfolio.
4. Interest rates increase, and assuming Pankaj has a substantial bond portfolio.
(2)
A. 2 and 3.
B. 3 and 4.
C. 1, 3 and 4.
D. 1, 2 and 4.

4) By your recommendation Pankaj has invested a sum of Rs. 25,000/- in an equity

Mutual Fund which is closed end for five years. The Mutual Fund Asset Management
Company has collected Rs. 100 crore in NFO of this closed end fund. The initial
issue expenditure is Rs. 8 crore. Pankaj wants to know what would be the NAV of his
investment in this closed end fund upon allotment. (5)
A. Rs. 9.9200
B. Rs. 9.7500
C. Rs. 9.2000
D. Rs. 9.9977

5) Pankaj wants to know the exact amount eligible for deduction u/s 24 and u/s 80C
applicable to him for the home loan repayment in the AY 2007-08. As per your
calculations the same should be______________________. (5)
A. Rs. 9,298/- u/s 24 and Rs. 22,262/- u/s 80C.
B. Rs. 9,413/- u/s 24 and Rs. 22,147/- u/s 80C.
C. Rs. 8,998/- u/s 24 and Rs. 22,562/- u/s 80C.
D. Rs. 9,173/- u/s 24 and Rs. 22,262/- u/s 80C.

6) Which of the following is/are not necessary in the Financial Plan report of Pankaj?
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 1.Copy of the letter of engagement;
2.Assessments of his financial situation and risk profile;
3.Summary of his objectives;
4.Recommendations, including alternative strategies;
5.Risks associated with each recommendation, including alternative strategies;
6.Transaction costs and penalties applicable to implement each recommendation;
7.Conflicts of interest;
8.Implementation and follow-up plan;
9.Summary of planning forecasts and expected results based on assumptions
used; and
10. Decision-making process and performance measurements. (3)
A. 1, 3 and 10.
B. 5, 7, 8 and 9.
C. 2, 4, 6 and 10.
D. None of the above

7) Pankaj wants to invest in shares of XYZ ltd the details of which are as follows:
- Required rate of return is 16%.
- Face Value Rs. 50/-
- Expected Dividend payout ratio is 30%.
- Expected return on Equity is 20%
What price would you recommend for a share of XYZ Ltd? (5)
A. Rs. 140/-
B. Rs. 150/-
C. Rs. 160/-
D. Rs. 120/-

8) Pankaj wants to know his Income from House Property for the AY 2007-08. Assume
interest portion on the housing loan for the entire year 2006-07 was Rs. 9,000/-.
(5)
A. Rs. 7,800/-
B. Rs. 15,995/-
C. Rs. 6,995/-.
D. RS. 7,835/-

9) What amount would Pankaj receive at maturity of his PO MIS? (3)

A. Rs. 60,400/-.
B. Rs. 66,000/-.
C. Rs. 66,400/-.
D. Rs. 70,800/-.

10) According to you which of the following could work out to be an effective Estate
protection strategy for the couple? (3)

A. Creating a Trust
B. Writing a Will
C. Purchase of mortgage redemption insurance policies
D. Gifting the estate to unmarried daughter

11) Pankaj, born in 1947, has a life expectancy at birth of 65 years. He would retire in
2007. His wife, born in 1951, has a life expectancy at birth of 70 years. Pankaj is
planning to buy an annuity at the time of retirement to be paid to him or his wife till
any one of them is alive. What should be the period of this annuity? Assume that their
life expectancies have not changed. (3)
A. 5 years
B. 14 years
C. 12 years
D. 9 years

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12) To avoid higher premium, Pankaj has opted for statutory minimum cover while taking
insurance for his car. One day, while driving, his car hit another vehicle parked on the
roadside causing damage to it for Rs. 10,000/- and later hit neighboring wall causing
damage worth Rs. 8,000/- to it. In this accident Pankaj’s car also suffered damages
worth Rs. 12,000/-. How much claim would be admissible by the insurance company
in this incident? (3)
A. Rs. 30,000/-
B. Rs. 12,000/-
C. Rs. 22,000/-
D. Rs. 18,000/-

13) In case you recommend Pankaj to put 60% of his money into risky asset offering a
10% return with a standard deviation of 8%, and to put the balance of his funds in the
risk-free asset offering 5% return, what is the expected return and standard deviation
of Pankaj’s portfolio in such a situation? (3)

Expected Returns Standard Deviation

A. 6.0% 6.8%
B. 8.0% 8.0%
C. 8.0% 4.8%
D. 10.0% 6.6%

14) Post retirement Pankaj does not want to sit idle at home and has been looking for
opportunities to keep him busy. He has now come across two projects, each with a 12%
required rate of return and under given cash flows.

Project A Project B
Initial cost Rs. 15,000 Rs. 20,000
Life 5 years 4 years
Cash inflows Rs. 5,000/year Rs. 7,500/year

If the projects are independent, you would advise Pankaj to: (3)
A. reject both projects.
B. accept Project A and reject Project B.
C. reject Project A and accept Project B.
D. accept both projects.

15) Using the above data if the projects are mutually exclusive, you would advise Pankaj to:
(3)
A. reject both projects.
B. accept project A and reject project B.
C. reject project A and accept project B.
D. accept both projects.

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 Keys for Challenge Status exams
Note: No negative marks for wrong answers

STAGE - 2

S No: Correct Marks

1 A 2
2 B 2
3 B 2
4 D 5
5 D 5
6 D 3
7 B 5
8 C 5
9 A 3
10 C 3
11 B 3
12 D 3
13 C 3
14 D 3
15 B 3

Total 50 marks