FIN 252 – Personal Finance Assignment
Read the following (2) case study’s and answer the corresponding questions:
Each question has different weighting and should guide you to the amount you should write about each.
Some questions require calculations and full workings should be shown.
This assignment should be done in report format.
Tables can be included when doing calculations.
Case Study 1)
“Taking out a Margin Loan in Australia”
Carly is 26 and has just received a promotion at work. She now earns $10,000 more than the threshold at which the 37% marginal tax rate cuts in.
Carly is unhappy at losing 37% of her money in tax. She hopes by investing in a share portfolio she will be able to reduce this tax liability.
Carly has spoken to a margin lender who has suggested that she negatively gear her share portfolio by concentrating on stocks that place more emphasis on capital gains rather than income. The lender has recommended a portfolio with a weighted Loan to Value ratio of 70% and Carly is happy to contribute $60,000 of her own money to borrow the maximum amount that this equity contribution allows using interest only loan.
Carly lives with her partner in rented accommodation. They like renting as this gives the freedom to move around take holidays and not worry about maintaining a house and meeting mortgage repayments. Carly believes that her investment time horizon is about 7 years and would like you to do some financial projections on this basis.
Carly also provides you with the following information and assumptions:
– Grossed up dividend income will be 2% per annum
– Capital gain will be 10% per annum
– Interest cost will be 8% per annum
– For the sake of arithmetic simplicity, the marginal tax rate will stay at 37% even when capital gains are realized.
Questions for Case Study 1 – “Taking out a margin loan in Australia”
Q1 – (2.5 Marks) – If Carly decides to take out a margin loan what will be the:
a) Net annual gain or loss?
b) Accumulated net annual gain or loss over 7 years?
c) Compounded capital gain over 7 years?
d) Compounded capital gain net of CGT based on the assumption that she sells the share portfolio after 7 years?
e) Total net gain (the accumulated net annual loss and the compounded capital gain net of CGT) after 7 years after the principal of the loan has been repaid?
f) Annualized rate of return on equity?
Q2 – (2.5 Marks) – Redo the calculations for all of question 1 based on the assumption that Carly does not borrow any money and instead invests her $60,000 in equity only.
Q3 – (1 Mark) – How does the annualized return on equity differ between scenarios 1 and 2 above? Write a brief report (4 – 5 Sentences) to Carly to explain why these figures differ.
Q4 – (1 Mark) – Outline the risks inherent in her margin lending strategy
Q5 – (1 Mark) – Assuming that Carly is not satisfied with the annual return on equity via the margin lending strategy, what leveraged derivative instruments are available to her in order to pursue a more aggressive strategy.
Case Study 2 – “Establishing Personal Insurance Needs in Australia”
Eddie and Kaye Turner aged 39 and 37 respectively, have four children aged 4,6,8 and 10. They own their own home, which has a current market value of $500,000, and have a mortgage of $150,000.
Eddie is a self-employed butcher who employs 3 staff. Eddie and Kaye are in partnership and share profits equally.
Eddies annual income is $80,000. Kaye works part time helping in the butchers shop and also part time as a schoolteacher’s aide; she also receives $15,000 as a salary from the school.
Both Eddie and Kaye contribute to superannuation funds. Eddie has an accumulation fund, which currently has a balance of $250,000. Kaye joined her fund more recently and has a balance of $105,500. Eddie has affected a term life cover on his life for $200,000 with Kaye named as the beneficiary. Kaye does not have any term life insurance cover.
Eddie and Kaye have assets, which are mainly in the butchers shop, totaling $150,000. The turners have a car each. Eddies is a 2014 model, which is leased and has $30,000 outstanding on it at present.
Kaye has a 2009 van so that she can transport the children to school and various sporting clubs. Her van is valued at $10,000 and is fully paid for. Personal loans, credit cards and other outstanding debts amount to $20,000
The family’s monthly expenses amount to $8,000. The Turners feel that all their children should receive a university education and expect them to be dependent until they turn 21 years of age. They expect to contribute a total of $200,000 to the cost of the children’s university education. As each child ceases to be dependent, the monthly expenses will reduce by $1,000 a month. Eddies life expectancy is 82 and Kaye’s is 86.
Questions for Case Study 2 – “Establishing Personal Insurance Needs in Australia”
Q1 – (2.5 Marks) – Calculate the amount of cover required for the family’s future in the event of Eddie’s death.
Q2 – (2.5 Marks) – Calculate the amount of cover required for the family’s future in the event of Kaye’s death.
Q3 – (1 Mark) – You have advised the turners of the amount of insurance cover they need. They find it hard to believe that such a large amount is needed. They say that, by insuring for a lower amount and investing the funds, the required amount could be achieved.
Explain to them the problem with this approach.
Q4 – (1.5 Marks) – Discuss the need for the following covers for both Eddie & Kaye (3 -4 Sentences each question)
a) Total and permanent disability insurance cover
b) Trauma insurance cover
c) Income protection insurance cover
Q5) – (1 Mark) – When talking about income protection insurance, Eddie & Kaye ask if there is some way they could cover their business overheads against a time when the butchers shop would have to close for a month or so as a result of some unknown health risk.
Explain the business overheads insurance and advise the amount of cover that should be taken. (6 – 7 sentences)
Q6) – (1 Mark) – When completing the personal health questionnaire Kaye indicates that she has had no history of breast cancer. However, 3 months after completion of the contract, Kaye has tests, which confirm some minor breast cancer tumours.
Discuss whether Kaye’s term life insurance is still valid. (6-7 Sentences)
Q7) – (0.5 Marks) – Outline insurances other than the personal risk covers discussed so far in this case study that Eddie & Kaye should have as part of their overall risk protection plan. (5 -6 sentences with examples)