PART ONE–FOUNDATIONS IN FINANCIAL PLANNING

PART ONE–FOUNDATIONS IN FINANCIAL PLANNING

100 points total

Due on May 2nd

Megan and Kevin Lee–The Newlyweds

After reading Chapters 1, 2 and 3, you probably realize that Megan and Kevin’s financial goals

are not defined well enough in the original case to serve as the basis for their financial plan

and cash budget. Upon further review, Megan and Kevin have restated their financial goals

in order of priority as follows:

• Pay off all existing credit card balances within the next 2 years.
• Have liquid assets equal to 3 month’s net salary within the next 2 years for an

Emergency fund.

• Save \$10,000 for the purchase of a second car in 3 years.
• Buy a house within 5 years. Megan and Kevin plan on using the inherited funds that are currently invested in the Fidelity Magellan mutual fund for this goal.
• Save \$6,000 for a down payment on a new car to replace the Explorer within 5 years.
• Increase contributions to Kevin’s 401(k) plan from 5% to 8% of his gross salary.
• Have enough accumulated in an account to provide Kevin’s father \$12,000 a year during his retirement years. They expect Lyle will retire in 20 years at age 70 and will live 15 years after retirement. Kevin and Megan would like to have all the money accumulated by the time Lyle retires.
• Establish a regular savings/investment program to accomplish these goals.

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Megan and Kevin Lee would like your help in starting their financial plan. Review Megan and Kevin’s financial and personal information before answering the following questions.

1. Which phase of life cycle is Megan and Kevin Lee are most likely in?( 5 points)

1. using the January 1, 2002 asset and liability information, develop a balance sheet for

Megan and Kevin Lee. Assume they have no unpaid bills. What is the Lee’s net worth?(15 points)

HINT: Total Assets = \$75,748.

1. Using the income and expenditure information for 2001, complete an income and

Expense statement for Megan and Kevin. Use the “cash flow” concept for this

Financial statement including all money inflows as income and all outflows as

Expenditures. Did Megan and Kevin have a cash surplus or a cash deficit in 2001?

What impact does the 2001 cash surplus (deficit) have on the following years

(January 1, 2002) balance sheet? (15 points)

HINT: \$4,692 is the amount for either the surplus or deficit

1. Use the Pie Chart approach to visually represent the client’s current financial situation and compare it with benchmark to make recommendations. (15 points)

1. Based on Megan and Kevin’s financial statements, calculate the following ratios:

Liquidity ratio

Debt ratio

Ratios for financial securit

Compare the ratios with the age appropriate benchmark to analyze the client’s financial condition. (15 points)

1. Assume that Megan and Kevin can earn 2% after inflation and taxes on their emergency fund and 4% after inflation and taxes on the car goals. In figuring the savings required for Kevin’s father’s retirement fund, Megan and Kevin assume that they could earn 7% after taxes and inflation on the money once his father retires. While they are accumulating the money, they feel they can take more risk and earn 9% after taxes and inflation. Using time value calculations, how much would Megan and Kevin have to save this year to be on track in meeting their goals for the second car, the down payment for a new car to replace the Explorer and the fund for Kevin’s father’s retirement years? (20 points)”

1. Use the two step/three panel approach combined with metric approach in order to analyze the client’s financial independence and risk profile. Make appropriate recommendation to stabilize the risk profile, debt management, savings and investment management. (15 points)

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