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Chapter #7 7 What is APR and why is it important? 14 Why borrow using secured debt? 19 Jeremy is in financial difficulty. He owes $5,000 and cannot pay it back now. Should he declare bankruptcy? Why? What do you think he should do? 7.3 Melinda has a 15-year fixed-rate mortgage for $150,000 at a 6.5 percent rate. Calculate her monthly mortgage payments. 7.7 Elena is in the 28 percent bracket and has the following real estate and nonreal-estate-related costs. Nonmortgage interest and principal $ 4,000 Mortgage interest 15,000 Mortgage principal 7,000 Real estate taxes 8,000 Homeowner’s insurance expense 2,000 Net salary 70,000 Chapter #5 1 What is a balance sheet, and why is it important? 7 What is a pro forma statement? What is its use? Case Application FINANCIAL STATEMENTS ANALYSIS The Balance Sheet Page 129 Richard called and said that he had compiled a list of assets and would send it. It came a few days later. His assets included a home worth $300,000, approximately $350,000 in securities, two cars worth $40,000 with loans of $15,000 against them, and other assets including jewelry (worth $5,000), art ($5,000), and furniture ($7,000). Richard and his wife had money market funds of $2,000, a bonus due of $5,000 net of taxes, and credit card payments due of $12,000. Their house had a $130,000 mortgage. Case Application Questions 1. 2. 3. 4. Construct the balance sheet. Does it look substantial? Would you tell Richard and Monica that it was strong? Why? Complete the balance sheet section of the plan. Chapter #6 1. 2. 3. 4. 5. 6. What is cash flow planning? Why is cash flow planning so important? List five reasons for saving. Why do some people have difficulty saving? Provide five methods for helping people to save. Why do people construct a budget? Problems 6.1 April made $50,000 in year 1 and $60,000 in year 2. She had the following yearly outflows: Year 1 Year 2 Nondiscretionary $25,00 0 $27,00 0 Discretionary 10,000 12,000 Capital expenditures 5,000 13,000 Debt repayment 6,000 0 Calculate April’s operating cash flow and net cash flow for each year. Page 149 6.2 Using the following statistics, calculate Jackson’s current and emergency fund ratios. Current assets $2,000 Current liabilities 1,000 Liquid assets 8,000 Marketable securities 20,000 Monthly household $6,000 Case Application SAVINGS AND THE CASH FLOW STATEMENT Page 150 Richard came in with his cash flow statistics and very helpful notes on projections. His list included Revenues Salary $100,000 Investment income $8,000 Outflows Home related $20,000* Food 5,000 Clothing 8,000 Health care 6,000 Transportation 2,000 Personal 3,000 Recreation 4,000 Cars, entertainment 9,000 Hobby 1,000 Gifts and charitable contributions 2,000 Insurance 6,000 Taxes 26,000† * Includes mortgage interest and principal payments, property taxes, home maintenance, and home insurance. † Net of $3,000 allowable tax loss with $191,000 tax loss carryforward on original 200,000 loss. He said to assume that his salary will rise 6 percent a year, and his investment income is 11 percent a year (the investment loss came a year ago). His expenses should rise 3 percent a year except for medical, which will grow at a rate of 6 percent yearly, and taxes, which will grow at about 7 percent a year. Richard said he was not worried about the losses taken. He would make them up, but Monica insisted that they save additional monies. He wanted to know what I recommended to help him save. He said he knew Monica was secretly putting away part of her household money into an account in her own name. Case Application Questions 1. 2. 3. 4. What observation do you have about the couple’s expenditures? What might the conversation above tell you about Richard? What might Monica’s actions tell you about both Monica and Richard? What recommendations would you have to help them save more? Chapter #13 1 Why is retirement perceived as so important to people? 4 Explain the difference between a defined benefit and a defined contribution plan. 5 Which plan is more likely to be attractive to a younger person, a defined benefit or a defined contribution plan? 6 Why do people save through qualified pension plans? Case Application RETIREMENT PLANNING Part 1 At Page 419 the retirement planning meeting held recently, Richard and Monica were in agreement that they were well short of the money they needed for retirement at Richard’s age 65. Monica said she was thinking of handling investments herself. Richard said he wanted to do it and thought that savings outside the pension given current lower tax rates for capital gains and dividends made sense. Case Application Questions 1. What do you think of Monica’s idea of taking control of retirement investing? Part 2 Brad and Barbara also attended the meeting. They said they were too young to start saving for retirement. Retirement seemed “hundreds of years” away and they wanted to have fun today. They would have plenty of time to save for retirement when they were in their 50s. Case Application Questions 1. 2. 3. 4. How do you feel about their beliefs? Describe the disadvantages of their approach. Suppose they wanted to have $1 million accumulated in 40 years. Indicate how much money would have to be saved each year if they started now. Assume that the money would be accumulated in personal accounts and earn 6 percent a year after taxes. ...
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