Case Application: Financial Statement, Cash, and Debt Analysis

Balance Sheet - 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. 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.

Cash Flow - 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. Richard came in with his cash flow statistics below.

Inflows ($)		Outflows ($)
Salary	100,000	Mortgage & Home Maintenance	20,000
Investment Income	8,000	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 & Charity	2,000
		Insurance	6,000
		Taxes	26,000

Debt - Richard and Monica have diametrically opposite points of view on debt. Richard views debt as an opportunity to generate cash to make up for past investment losses. He has asked you whether he should remortgage his house and place the proceeds in the stock market. He says the present time may be appropriate to refinance because market rates for mortgage loans of 6.5 percent are well below his mortgage rate of 8 percent. He wants to use an adjustable rate that provides an even lower 4 percent rate for the first year with rates thereafter 2 percent above the five-year Treasury rate.

Richard wants a 30-year mortgage because he said he doesnt expect to go anywhere and the annual repayments would be low. He said he was thinking about buying a new car. While the existing one worked well, he was tired of it. If cash flows get tight, he isnt at all averse to using credit card debt. He says that whereas credit card rates are high, the overall impact is not great and people manage to pay money back. Monica has listened quietly to Richard with a pained expression on her face, occasionally shaking her head. She says she is afraid of taking on more debt and wants a budget to limit spending of all types.

Case Application Questions:

Construct the balance sheet.

Would you tell Richard and Monica that it was strong? Why?

Complete the balance sheet section of the plan.

What recommendations would you have to help them save more?

Construct their cash flow statement for this year and the next two years.

What do the future cash flow figures indicate?

Complete the cash flow section of the plan.

What do you think of Richards idea of borrowing to place money in the stock market?

Do you think the couple should refinance their mortgage?

Complete the debt and future budgeting part of the plan.