FINC 350 CASE STUDY/

PROJECT

Overview

This

project requires you to

apply the concepts

learned in

FINC 350

course. The course has equipped you

with basic

financial planning

skills

. For this project, you

must analyze the gi

ven information

in the

case,

gather

relevant

information from various primary and secon

dary sources

(In some cases other than the

textbook

)

and use

your

acquired

skills in making optimum decisions.

Goal

s

Help Michael and Mary Gordon

ac

hieve their

personal and financial goals

by

help

ing

them with

their

objectives in

various areas such as

financial

statement

analysis,

credit management, home purchase,

insurance analysis,

retirement planning

, education planning, tax planning

and investment planning.

Deliverables

A report with answers to the questions. Maximum

6

-

7

pages. I am not looking for prose!

DUE DATE: December 8

th

, 2020; 11.59PM

Guidelines

1.

Keep the answers concise

but address all questions thoroughly.

Show your calculat

ions

for the

questions with numbers.

2.

Facts must be correct, and opinions must be well supported.

3.

Please list the source of your information where relevant.

4.

Creativity in solving problems in the case will be given extra points. However, solutions must

adher

e to facts ie fabrication will hurt your score.

Sco

r

ing

M

ax

score: 50

po

ints. See

points for eac

h individual question below.

Page

2

of

8

FINC 350 Case Study/

Project

Michael and Mary Gordon Family

Michael and Mary Gordon are

asking you to develop

a financial plan to accomplish their goals and

objectives. They have great aspirations for the future,

however,

are concerned about their current

financial situation. Assume today's date is January 1, 20

X

9

Personal Background and Information

Michael Gordo

n (Age 32): Michael is a Vice President

of business development at

Cornerstone

,

LLC

,

a

company that helps firms with their digital presence. He has been employed there

since its founding

,

8

years

ago

. The company faces heavy

competition,

and

its

profitabil

ity has been erratic. His job however,

is fairly secure.

His annual salary is $8

8

,000.

He is entitled to a performance

bonus of 2

0

-

30% of his

salary.

Owing to industry conditions a

nd

poor company profitability, n

o bonus was paid

for

the last two

years.

He

is in good health with no history of illness and has never smoked.

Mary Gordon (Age 3

2

): Up until Sam was

born;

Mary was a web designer at a digital design company.

She is uncertain when she will return to work.

She is in good health with no history of

ill

ness and

has

never smoked.

The Gordons: Michael and Mary have been married for 7 years. They have two children, Max and Sam.

Michael's mother, Carol lives with the Gordons.

They have a no

criminal

record and have a clean

financial history

.

Family

and Goals

Max is 6 years old and is in 1

st

grade. He goes to a public school near where the Gordons live. He

has shown a strong interest in music and his parents

are considering enrolling him for

music

lessons.

The Gordon's expect

to

spend $20,000 per yea

r for four years starting when Max turns 18

and

goes to college.

Sam is 4 years old. She attends pre

-

school.

Ca

rol,

68 years

,

is Michael's mother. She had a heart attack two years

ago and

has been living

with the Gordons since she left the hospital. She is

retired and uses income from her

investments

and social security income

to meet her living expenses. She did not qualify as a

dependent of the Gordons

(For Tax purposes)

in 20

X

8

. She is concerned that her investments

may not perform well in the future and

M

ichael and Mary may have to provide

financial

support.

John and Jessica

Paulson

are Mary's parents. They ar

e in good health and have offered

to

help

pay for Sam's

education expenses

,

if

required

. They are retired

,

financially secure

and travel

often. Mar

y is their only child.

Michael plans to work until the age of 65.

The Gordon's

expect to live till they are 95.

For retirement they want to plan for 100% of wage replacement at Michael's retirement,

without considering social security income.

Other Financi

al Details

Michael and Mary have FICO Scores of 710 each.

They expect to earn 8.5% per year over the long term in all their investment accounts

Page

3

of

8

FINC 350 Case Study/

Project

They file their taxes 'Married Filing Jointly'

. They take the standard deduction and have child tax

credit for each of their two children.

Michael has a 401 (K) plan at work. His company matches his contributions up to 3% of his

salary

.

The Gordon's have a H04

renters'

policy (A contents Broad Form policy that covers contents and

liability) without endo

rsements. The

annual

Premium is $600. Contents coverage is $25,000.

Liability coverage is $100,000.

Their Current Auto Insurance

details is shown below:

The Gordon's answer to the 'Vanguard Investor Questionnaire'

is

: 1: F 2. E 3. E 4. A

5. E

6. E 7. E 8. A 9. A 10. D 11. A

Holdings in Brokerage Account

:

Net Asset Value of the Oakmark Fund (OAKMX) as of Jan 1, 20X9: $77.44

External Information

Economic Information

General Inflation

is expected to be 2.5% for the foreseeable future

Education inflation is expected to be

5

% annually.

Real GDP growth has been 2.25% and that is expected to continue for the next several years.

T

-

bill are considered proxy for risk free rate of return

and are currently earning 1.5%

Expected Investment Returns

of Asset Classes

Name of Mutual Fund (Ticker)

Purchase Date

No. of units

Basis

Oakmark Fund (OAKMX)

6/7/20X6

34

$69.46

Oakmark Fund (OAKMX)

01/01/20X8

30.58

$76.00

Return

Standard Deviation

Small Company Stocks

12%

18%

Large Company Stocks

10%

16%

Bonds

5.50%

5%

Type

Personal Automobile Policy (PAP)

Liability (Bodily Injury)

$50,000/$100000/$10,000

Medical Payments

10,000 per person

Uninsured Motorist

$100,000/$50,000

Collision Deductible

$1,000

Comprehensive Deductible

$500

Annual Premium

$900

Page

4

of

8

FINC 350 Case Study/

Project

STATEMENT OF FINANCIAL POSITION (Jan 1, 20X9)

ASSETS

Joint Checking account

$21,500

Joint Savings account

$1,000

TOTAL CURRENT ASSETS

$22,500

Section 401 (K) Vested Plan*

$43,000

Brokerage Account (100% Equity Mutual Fund)

$5,000

TOTAL INVESTMENTS

$48,000

Automobile

$15,000

Jewelry

$13,500

Furniture/Household

$60,000

PERSONAL USE ASSETS

$88,500

TOTAL ASSETS

$159,000

LIABILITIES & NET WORTH

Current Liabilities

Credit Cards**

$1,500

`

Car Loan***

$3,400

Student Loan

$2,300

Long Term Liabilities

Credit Cards**

$3,500

Car Loan***

$7,200

Student Loan

$15,000

TOTAL LIABILITIES

$32,900

GORDON FAMILY NETWORTH

$126,100

TOTAL LIABILITIES & NET WORTH

$159,000

* 401(K) is invested in Cornerstone LLC stock

**Credit Card APR: 20%. Credit Limit $10,000

*** Car loan has an interest rate of 4% and is a 5 year loan with 3 years remaining.

Page

5

of

8

FINC 350 Case Study/

Project

STATEMENT OF CASH FLOW (20X9 Expected)

Michael's Salary

$88,000

Investment Income

Interest

$500

Other Income

$600

TOTAL INCOME

$89,100

Pre Tax Contributions

401(K) Contributions

$2,000

TOTAL PRE-TAX REDUCTIONS

$2,000

Taxes*

Federal (Including FICA)

$7,025

State

$1,250

TOTAL TAXES

$8,275

Fixed Expenses

Rent

$24,000

Renter's Insurance

$600

Child Care

$2,500

Utilities & Phone

$3,600

Cable and Netflix

$840

Auto Maintenance

$1,500

Church Contributions

$500

Tuition, Education, Classes

$12,500

Car Payment (P&I)

$3,750

Car Insurance

$900

Credit Card Payments

$1,300

Student Loan Payment

$2,450

TOTAL FIXED

$54,440

Variable Expenses

Entertainment & Travel

$5,000

Clothing

$4,500

Groceries

$3,700

Outside Meals

$6,500

Fitness: Gym and Trainer

$2,400

Miscellaneous

$2,000

TOTAL VARIABLE EXPENSES

$24,100

TOTAL OUTFLOW

$88,815

NET DISCRETIONARY CASH FLOW

$285

*Michael takes the standard deduction, and child tax credit for his two children

Page

6

of

8

FINC 350 Case Study/

Project

OBJECTIVES

AND QUESTIONS

1.

Ratio analysis

and budgeting

(

10

P

oints)

a)

Calculate the following ratios for the Gordon's

and comment if they are within

prescribed

benchmark

: Emergency fund ra

tio, Current Ratio, Housing Ratio

1, Housing Ratio 2, Debt to total

assets, Savings ratio.

b)

Recommend

ways

they

can alter their expenses

,

savings,

cash flow and balance sheet to

optimize their

finances using

the

opportunity cost

of various options

.

2.

Home Purchase

(

6

Points)

a)

The Gordon's are considering buying a house in New Jersey. Analyze their current financial

situation and discuss what is the maximum amount of monthly

housing costs

they can afford.

b)

Based on your answer

in a) above

, w

hat is the maximum value (Approximately) of th

e property

they should consider?

Assume that the monthly cost of property taxes and insurance is $300.

Assume they would put 20% of the home value as a down payment. Further, assume they are

planning to take a

30

-

year fixed mortgage. (Hint: You will have to use publicly available

information to find current 30

-

year mortgage rates)

Suggested sources of information

LendingTree:

https://www.lendingtree.com/

Zillow.com:

https://www.zillow.com/

3.

Insurance

(

8

Po

ints)

a)

Michael says, "I and Mary are in good health and fairly young, we don't think we need any life

insurance.

"

Evaluate the above statement considering his family

's

situation.

b)

Calculate how much life insurance you

suggest Michael should buy

using the

Human Life Value

Method

. Assume his total tax rate is 2

2

%, and his personal consumption is 20% of his

after

-

tax

earnings, and risk free rate for this calculation is 6%.

c)

Identify one

policy

(How long, how much, type)

and

the company

(Eg Geico, State Farm, Met

Life)

that Michael should buy life insurance from.

d)

Michael has

the Omnia

Bronze medical insurance offered by

Horizon

Blue Cross Blue Shield of

New Jersey.

Click here for explanation of benefits.

(This document is also available in FILES on

Canvas)

Based on the explanation of benefits help

Michael and Mary understa

nd the following

situations. Answer each question independent of the others

:

1)

What would be the cost of an annual routine physical?

2)

Max fractured his wrist and had to be taken to the Emergency room. If the total bill

for treatment was $1500, how much would

Michael have to pay from his pocket.

Assume there were no other medical bills for the year.

3)

For this question, assume this year the family has already incurred medical expense

of $14,300 (Not including premiums and penalties). They incur $1500 for a visit

to a

Page

7

of

8

FINC 350 Case Study/

Project

doctor's office visit.

The doctor was listed as a Tier 2 provider. How much will the

insurance cover?

e)

The Gordon's ask you to explain their current

A

uto

In

surance and whether they should make

any changes.

Explain each line in the Auto Insurance detai

l (See under 'Other Financial Details')

and what changes they should make (You do not have to calculate the premium with the

changes)

Suggested sources of information for this topic (You are not limited to these sources)

GEICO get a quote:

https://www.geico.com/life

-

insurance/

State Farm get a quote:

https://www.statefarm.com/insurance/quotes/life

-

quote

MetLife get a quote:

https://www.metlife.com/insur

ance/life

-

insurance/rapid

-

term

-

life

-

insurance/#

4.

Retirement

& Education

(

7

Points)

a)

Michael's company is expected to announce a policy

,

that in the future, it will match 50% of the

contributions up to 8% of the salary. How much should Michael contribute to his retire

ment

account to tak

e full advantage of this policy and

would you recommend that he do so

?

b)

Explain to the Gordon's the tax benefit of a 401 (K) account.

c)

Calculate their Retirement Needs in Present Value Terms (PV Retirement Today)

d)

Calculate the

dollar amount they should contribute per year to save for Max's education? Please

also explain to the Gordon's which education account they should contribute to and what the

tax benefits of this

type of

account are.

5.

Investments

(

7

points)

a)

Is

Michael's 401 (K)

portf

olio

invested appropriately? Explain your answer.

b)

You ask Michael and Mary to answer the '

Vanguard Investor Questionnaire'

(

This document is

also available in FILES on Canv

as).

Their

answer

s

are

under 'Other Financial Data)

. Use the

'Answer Key' and the 'Suggested Investment Mix

' at

the end of the questionnaire

to create a

portfolio.

c)

What is

the

expected return of your suggested portfolio? (Use the 'Expected Investment

Returns'

of ass

ets classes

under 'External Information'

)

d)

Based on the expected return calculated under c) how would you advise the Gordon's? (Your

recommendation should comment on whether the portfolio created based on their answers to

the questionnaire will help them re

alize their objective

s

or not and your recommendation on

what approximate mix of stocks and bonds they should invest in)

6.

Taxe

s

(

5

points)

a)

If the Gordon's sell all the units of the mutual fund in their brokerage account. What would

their tax burden on this sale

be

?

Assume their long

-

term capital gains tax rate is 15% and

their ordinary income tax rate is 22%

.

Page

8

of

8

FINC 350 Case Study/

Project

b)

Michael

would like you to

help him decide if he should take a $1000 deduction or a $1000

tax credit. Explain the difference between the two choices assuming th

eir marginal tax rate

is 22%.

7.

Estate Planning

(2

p

oints)

a)

What basic estate planning documents would you recommend the Gordon's have. (You only

need to list them).

8.

Financial Statement

(

5

points)

a)

How would the Gordon's balance sheet change if they purchase a home

for $300,000

and

finance it with a mortgage

for $240,000. Assume the down payment comes from existing

assets. You only

need

to show the change to their Total Assets, Total Liabilities and Net

Worth.

b)

How will the Gordon's net worth change i

f they do the fo

llowing 1) Save $5,000 from their

paycheck 2) Payoff a loan of $4,000 3) Purchase a car for $25,000 and finance it entirely with

a car loan