FACULTY OF BUSINESS, ECONOMICS AND LAW DEPARTMENT OF FINANCE

FIN5FPL FINANCIAL PLANNING CASE STUDY

Due Date: 12 noon on Friday 17 May 2013

Assessment Weight:
Total of 20 marks

Word Limit:
Ten A4 pages typed in 12-point font.

Submission:
You are required to submit an electronic copy of your assignment submission through LMS by the end of the submission date. You are ALSO required to submit a hard copy of your assignment in the designated Assignment Box on Level 2 of the Donald Whitehead Building by 12 noon of the date of submission.

Late submission:
If the assignment is submitted late without prior permission, a penalty will be imposed at the rate of 2 marks deducted PER DAY that the assessment is late. Assignments submitted more than one week late will not be marked and will receive a mark of zero. To pass this subject, students are required to submit and satisfy the requirements of the 2 assignments.

Statement of Authorship
A signed Statement of Authorship must be submitted with your assignment.

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CASESTUDY1
JobeandEllaWatson 20NapierStreet, EssendonVIC3562 JobeandEllaWatsonhaveapproachedyoutoassistthemwithsomefinancialplanningadvice.Jobeis earningagoodlevelofincomeandtheirfamilyiscurrentlyenjoyingaverycomfortablelifestyle. However,JobeandEllaareanticipatingfurtherexpensesoverthenextfewyearswiththeirtripletsons enrollinginthelocalprivateprimaryschoolcommencingatthestartof2014.Thecoupleisconcerned whatimpacttheprivateschoolfundingandJobeshighriskcareerwillhaveontheirabilitytosaveand investforthefuture.JobesemployertheEssendonfootballClubcontributestheconcessional contributionlimitof$25,000p.a.toJobessuperfundhoweverEllahasnotworkedfor5yearssoisnot contributinganddoesnothavemuchinthewayofsuperannuation.Thecouplehasrecentlyseenreports thatindicatethatuponretirement,incomeneedsaregenerallytwothirdsofpreretirementincome. Giventheircurrentneeds,theyestimatethattheywillrequirearound$2.5mofaccumulatedsuper. However,giventheircurrentbalances,theydonotseehowtheywillbeabletoaccumulatesufficient funds.TheWatsonsfeelthattheycoulddowithsomefinancialplanningadvice. MEETINGstartofMarch2013
Fromaninitialmeetingwiththecouple,youderivethefollowinginformation:

1. PersonalDetails: SeeClientInformationSummary. 2. Clientobjectives:

BuildwealthbetweennowandwhentheyretireexpectedtobewhenJobeturns55yearsofage Thecoupleestimatetheywillrequireacombinedincomeof$100,000perannuminpresentvalue termswhentheyretire Toachieveasavingsratioof10% Toprovideimmediateprivateprimaryschooleducationforthetriplet's.Youanticipateyouwill require$20,000perchildpafor7yearsofprimaryeducationcommencingin2014. Toreducedebtlevelsasquicklyaspossible Topurchaseaninvestmentpropertyatthestartofthe2013/14financialyearseeadditional informationbelow. TominimiseJobestaxliabilityasmuchaspossible

3.

Expenses

JobeandEllacalculatetheirannualhouseholdexpenditureasacoupleforthe2012/2013yeartobeas follows:

$
28,700 2,000 5,400

Fixedexpenses Mortgagepayments(seefollowingpage) Rates Insurancepayments(includesprivatehealthinsurance) Variableexpenses Household(food,clothes)

49,000

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Utilities(telephone,electricity,gas,water) Carrunningexpenses Entertainment Annualholidays Workrelated(taxdeductible)Jobe Sundries

7,000 3,000 15,500 10,000 3,000 5,100

4. Assetsandliabilitiesexpectedasat30June2013: Assets: Item Costandyearof Expectedvalue purchase 30.6.2013

Familyhome Cars(2vehicles) Housecontents Shareholding Woolworths1,000 shares IncitecPivot15,000 shares WestpacBank650 shares $580,000March 2003 $90,000 $8,000 March2001 $93,300 February2008 $15,184 November2010 $700,000 $100,000 $100,000 $34,000 $46,000 $20,000

Owner
Jobe Joint Joint Jobe

Netreturn
Nil Nil Nil Fullyfranked dividendof3%p.a. ofcurrentvalue Fullyfranked dividendof2.6% p.a.ofcurrent value Fullyfranked dividendof5.0% p.a.ofcurrent value .5%p.a. 5.0%p.a.(netof feesandtaxes) 4.0%p.a.(netof feesandtaxes)

Savingsaccountwith WestpacBank Superannuation conservativefund Superannuation conservativefund

$200,000 $250,000 $50,000

Jobe Jobe Ella

Notes
1 Thesavingsaccountbalanceprovidedinthebalancesheetistheexpectedclosingbalanceasat 30June2013andincorporatesallincomeandpaymentsmadeduringtheyear.Youcanassume thatthecashsurplus/cashdeficitforthe2013yearisalreadyincludedwithinthesavingsaccount balance.

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Liabilities: Item

Owner

Amount Annualrepayments outstanding includesprincipleand interest

$310,000 $28,700

Interestrate

Housemortgage 20year

Jobe

6.5%p.a.

Additionalinformation:
Thevalueofthefamilyhomeandcontentsisexpectedtogrowbytheconsumerpriceindex(CPI) AssumeallofthecouplesexpenseswillincreasebytheCPIeachyear AssumeJobessalarywillincreasebytheCPIeachyear AssumetheCPIis3.5%p.a. Thecarsshouldretaintheirapproximatecurrentvalueovertheyears.Theywillbereplacedevery 34years.Youcanignoreanynewcarpurchasesforthepurposeofthisassignment. Thecapitalvalueofthesharesisexpectedtogrowat5%p.a. Assumeanysurplus/deficitcashisbanked/withdrawnfromthecouplessavingsaccount Assumeannualloanrepaymentsremainthesamedollaramounteachyearuntilalldebtsarepaid off Tocoverthelostincomewhentheirchildrenenterprimaryschool,thecoupleadvisethatalthough theywouldliketoretaintheircurrentlifestyle,theywouldconsiderreducingtheirentertainment andholidayexpensesby15%p.a.commencingJuly2013.Theywouldprefernottohavetoreduce anyotherexpenses. Thecreditcardisusedtopayforalloftheirnormalhouseholdexpenses. Interestincomeshouldbecalculatedbasedontheopeningbalanceofthesavingsaccount balance. YoucanassumethatJoberetiresfromfootballin3yearstime(30June2016)andtakeson employmentinastockbrokingfirmearning$120,000p.a.plusthestandardemployer superannuationguaranteecontribution. Thecoupleareseekingtoacquireaninvestmentproperty:

TheinvestmentpropertywillbeownedbyJobeandcost$600,000withasettlementdateof 01/07/2013atwhichtimetheWatsonswillrequireadepositof20%andwillborrowtherest. Thedepositwillbefundedfromthecouplessavingsaccount. Theinvestmentloanisinterestonlyatavariablerateof6.3% Propertyrunningcostswillbe$2,000p.a.anddepreciation$10,000p.a.Rentalincomeis estimatedat4%ofthevalueoftheproperty.Assume5%annualgrowthinthevalueofthe property.

Required:
Thecouplerequeststhatyouanalysetheircurrentandfuturefinancialsituationbasedontheabove informationandprovidesomesuggestionsonhowtheycouldimprovetheirlongtermnetwealth.The couplearenotsurewhattheirfinancialsituationwillbeoncethechildrengotoprivateschoolalthough theyrealiseitwillbeastruggle.Specifically,theyrequireareportwhichconsidersthefollowing: 1. A cash flow statement for the financial years ending 30 June 2013 and a forecasted cash flow statement for the year ending 2014, including tax calculations (use current tax rates for both years). 2. Abalancesheetasat30June2013andaforecastedbalancesheetat2014.
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3. A consideration of whether the couples accumulated superannuation is likely to provide them withthelevelofincometheyrequireatretirementthatwilllastthemfortherestoftheirlives. (i) You are required to provide a spreadsheet of accumulated superannuation for each year to2038. (ii) Based on these calculations, you are then to determine what income the couples accumulatedsuperannuationislikelytoprovidetheminretirement(PMTcalculation)and compare this to the level of real income that the couple would like to receive in retirement(seeclientobjectives). Notethecouplesrequiredincomeinretirementshouldbeexpressedin2038dollars. Note In the retirement income calculations that you perform, the number of years the couple are likely to live should be based on Australian life expectancy tables which can be accessed from thefollowinglink.Lifeexpectancyshouldbedeterminedatthetimeofthecouplesretirement. http://www.fahcsia.gov.au/guides_acts/ssg/ssguide4/ssguide4.9/ssguide4.9.5/ssguide 4.9.5.47.html 4. Critically analyse the financial situation of Jobe and Ella based on the information provided and discusstheramificationsofthetripletsarrivinginfourmonthstime. As well as providing an overall analysis, you are also required to include a calculation and discussion of relevant financial ratios (i.e. net worth, liquidity, savings and debt service) for both 2013and2014toillustrateandidentifypotentialproblemareas. 5. Jobe has already signed the contract on the off the plan property and as such is committed to thestrategy. (i) Based upon the Watsons projected financial situation, would you have recommended borrowing funds to purchase an investment property? Discuss the benefits, costs and risks of the investment property as a strategy giving regard to taxation, wealth accumulationandcashflow.

Discusswhatwould betheconsequenceson thedebtserviceratio ifJobewereto receive a30%paycut(duetopoorperformanceduringthe2013AFLseason)inthe2014financial year. 6. JobeandEllahaveheardfroma friendthatInsuranceBondsareaneffectivewayofaccumulating funds for the Childrens Education. Discuss the appropriateness of Insurance Bonds based on the Watsons circumstances and objectives giving regard to cost, investment selection, structure and taxation.

(ii)

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