1. Identify the stage of the life cycle that best describes Cory and Tisha today. What important financial planning issues characterize this stage? 

2. Based on the issues identified in Question 1 and your knowledge of the Dumont household, help Cory and Tisha complete Worksheet 1 to identify their short-term, intermediate-term, and long-term financial goals. 

3. Complete a simplified income statement for the Dumonts. (Hints: Data are presented both as background material and as listed annual expenses. Use Worksheet 5 as a guide.) 

4. Develop a balance sheet for the Dumonts (see Worksheet 4). Do they have a positive or negative net worth? 

5. Using information from the income and expense statements and the balance sheet, calculate the following ratios: 

a. Current ratio 

b. Month’s living expenses covered ratio 

c. Debt ratio 

d. Long-term debt coverage ratio 

e. Savings ratio 

6. Use the information provided by the ratio analysis to assess the Dumonts’ financial health. (Hint: Use the recommended ratio limits provided in Chapter 2 as guidelines for measuring the Dumonts’ financial flexibility and liquidity.) What recommendations would you make to improve their financial health? 

7. Do the Dumonts have an emergency fund? Should they? How much would you recommend that they have in an emergency fund? 

8. According to the Money article that Cory and Tisha read, they can expect to pay about $100,000 in tuition and related college expenses when Chad enters college and even more for Haley. The Dumonts hope that Chad will receive academic scholarships that will reduce their total college costs to about $40,000. Assuming that the Dumonts start a college savings program today and manage to earn 7 percent a year, ignoring taxes, until Chad is 18, how much will they need to save each year? How much will the Dumonts need to save each year if Chad does not receive scholarships? See Chapter 3. 

9. How much will the Dumonts need to save each year to accumulate $40,000 for Haley to attend college if they can earn 7 percent on their savings? Assuming that the Dumonts need to accumulate $110,000 to fund all of Haley’s college expenses, how much do they need to? See Chapter 3. 

10. How much will Tisha’s Great Basin Balanced Mutual Fund shares (currently valued at $2,300) be worth when Chad enters college, assuming the fund returns 7 percent after taxes on an annualized basis? How much will the shares be worth when Haley turns 18 years old? What will be the value of the shares when Tisha retires at age 67, assuming a 9 percent after-tax return and no deductions from the account? What has been the actual annualized rate of return for the fund since Tisha received it as a gift? See Chapter 3. 

11. Recall that the Dumonts set up a savings fund for a future down payment with gifts and contributions from their wedding. How much will this market index fund valued at $13,000 be worth in 3, 5, and 7 years if they can earn a current rate of return of 6 percent? How much will the fund be worth in 3, 5, and 7 years if they can obtain an 8 percent rate of return? See Chapter 3. 

12. Assuming an 8 percent return for the current year from their market index fund valued at $13,000 and a 15 percent federal marginal tax rate, how much will the Dumonts pay in taxes on their investment, either from their savings or from current income, this year? By how much, after taxes, will their account grow this year? See Chapters 3 and 4. 

13. Assuming that Cory does nothing with his 401(k) retirement account from his former employer and that the account grows at a rate of 5 percent annually, how much will Cory have when he retires at 67? If, instead, Cory takes control of the money and invests it in a tax-deferred IRA earning 10 percent annually, how much will he have at age 67? See Chapter 3. 

14. Using the income and expense estimates provided by Tisha, calculate the Dumonts’ taxable income using the 2017 tax information provided in the text. (Note: Ignore unearned taxable income from savings and investments.) 

a. Do the Dumonts have enough tax-deductible expenses to itemize deductions? 

b. Explain the tax ramifications of Cory’s student loan interest, estimated to be $652 for 2017. 

c. How much Social Security and Medicare taxes are withheld from Cory’s and Tisha’s income? 

d. What is the Dumonts’ total federal income tax liability? 

e. Do the Dumonts qualify for the child tax credit? If so, how will it affect their federal income tax liability? How will a payment or refund be determined? 

15. Based on the total Social Security tax, Medicare tax, and federal income tax liabilities calculated above, how close did Tisha come in estimating their tax liability? How does the difference between the estimated and actual tax liabilities change their financial situation? What recommendations would you make? 

16. Calculate and interpret for Cory and Tisha the differences among their marginal tax rate, average tax rate, and effective marginal tax rate. How might these rates change with life events, such as salary increases or the purchase of their home? 

The objective of the Continuing Case is to help you synthesize and integrate the various financial planning concepts you have been learning. The case will help you apply your knowledge of constructing financial statements, assessing financial data and resources, calculating taxes, measuring risk exposures, creating specific financial plans for accumulating assets, and analyzing strengths and weaknesses in financial situations. 

At the end of each book part, you’ll be asked to help Cory and Tisha Dumont answer their personal finance questions. By the end of the book, you’ll know more about Cory and Tisha than you can imagine. Who knows—maybe you have encountered, or will encounter, the same issues that the Dumonts face. After helping the Dumonts answer their questions, perhaps you will be better equipped to achieve your own financial goals! 

Background 

Cory and Tisha Dumont recently read an article on personal financial planning in Money. The article discussed common financial dilemmas that families face throughout the life cycle. After reading the article, Cory and Tisha realized they have a lot to learn. They are considering enrolling in a personal finance course at their local university but feel they need more urgent help right now. Based on record-keeping suggestions in the Money article, Cory and Tisha have put together the following information to help you answer their personal finance questions. 

1. Family: Cory and Tisha met in college when they were in their early 20s. They continued to date after graduation, and 6 years ago they got married. Cory is 31 years old. Tisha is 30 years old. Their son, Chad, just turned 4 years old, and their daughter, Haley, is 2 years old. They also have a very fat tabby cat named Ms. Cat. 

2. Employment: Cory works as a store manager and makes $45,000 a year. Tisha works as an accountant and earns $53,000 a year. 

3. Housing: The Dumonts currently rent a three-bedroom townhome for $2,000 per month, but they hope to buy a house. Tisha indicated that she would like to purchase a home within the next 3 to 5 years. The Dumonts are well on their way to achieving their goal. They opted for a small wedding and applied all gifts and family contributions to a market index mutual fund for their “dream” house. When they last checked, the fund account had a balance of $13,000.