Jeff and Mary Douglas, a couple in their mid-30s, have two children - Paul age 6 and Marcy age 7. The Douglas' do not have substantial assets and have not yet reached their peak earning years. Jeff is a general manager of a jewelry manufacturer in Providence, RI while Mary teaches at the local elementary school in the town of Tiverton, RI. The family needs both incomes to meet their normal living expenses and to meet unforeseen emergency purchases. Their cash flow situation is tight, and they have had difficulty growing a "nest egg" through savings and investing.

Jeff and Mary have discussed the needs of their two children who are typical, healthy, and active kids. They have discussed trying to have Mary stay at home, be with the kids more and run the household but her income is very much needed, and she also wants a career and doesn't want to put her teaching job on hold to be a stay-at-home mother. Jeff also wants (and needs) to work and his job often requires long days - beyond the 9-5 grind.

Now that both children are in school there is no day care need and Mary's job schedule matches nicely with the children's schedule, so she not only wants to continue to work but is thinking about completing a graduate degree. Currently, Mary can take most of the summer off from teaching (when the children are home on vacation) and so she enjoys a great deal of flexibility in the summer and spends quite a bit of time with the children in the summer.

Jeff is the breadwinner of the family, but Mary's contribution is also very significant. Jeff earns about 65% of the total household income with Mary earning the remainder. By completing a graduate degree, Mary could increase her salary by at least 20% but she would need to commit to a continuing education program at either Providence College or University of Rhode Island.

Although their net worth is not substantial, they have big dreams and aspirations. Their personal financial objectives relate to goals for a high standard of living. They want to help their children go to good colleges, a goal that they share with their own parents (the grandparents who want to help fund that dream). Jeff and Mary want to accumulate significant assets that allow for a comfortable retirement. Both are in excellent health and have family histories of long-life expectancies. Their retirements (at age 65 or so) could be a period of 20 or more years.

Current Financial Information

They own their home which they purchased two years ago for $285,000. Their town (Rumford, Rhode Island) tax office has assessed the home value at $200,000. Recently, Mary hired a certified real estate appraiser to prepare a home appraisal and his appraised value was $300,000 (the real estate appraiser based her opinion of value on recent sales of comparable homes in similar neighborhoods and considered current construction costs and land value.) While surfing the web, Mary noticed that their home is listed on Zillow.com with a Zestimate of $350,000. Zestimates are powered by an algorithm. Mary knows that the variables of the valuation system, including analysis of home exterior and interior and traditional real estate facts and figures images, can be inaccurate and may need updating, however Mary logs into Zillow often to see how the system is valuing one of the families largest and most important asset.

The mortgage on the home has a balance of $140,000. A review of the Douglas' financial information, bank statements, and other documents shows the following as of Dec. 31, 2022 :

• 2015 Camry worth about $11,000 (Kelly Blue Book), with a bank loan balance of $3,000
• 2014 Volvo S60 purchased six months ago for $14,500 is worth about $15,000 (Kelly Blue Book), with a bank loan balance of $10,000
• An insurance policy on Jeff's life with a face value of $100,000 with a cash surrender value of $2,500 and no policy loan balance. Mary is the beneficiary listed on Jeff's policy.
• An insurance policy on Mary's life with a face value of $10,000 and no cash surrender value. Jeff is the beneficiary listed on Mary's policy.
• Credit card balances that total $3,500.
• A savings account with a $1,000 balance.
• Two mutual funds earmarked for the children's college education. The account for Paul has a balance of $10,000 and Marcy's has $11,000 as a current balance. The fund has averaged an 8% annual rate of return over its life.
• 100 shares of Apple Inc. (NASDAQ: stock symbol = AAPL), formerly Apple Computer, Inc. You need to value this stock and all the stocks they own based on the Dec. 31, 2022 price per share. You will need to find that on the Internet. The cost basis is $120 per share.
• 200 shares of AT&T. The cost basis is $41 a share.
• 50 shares of Microsoft. The cost basis is $158 per share.
• 75* shares of Alphabet Inc. The cost basis is $1,600 per share. (*There was a 20:1 stock split after they bought the shares and so they now have 1,500 shares). Use 1,500 shares to determine the market value of the Alphabet stock.)
• A checking account with a balance of $3,000.
• Jeff estimates that their furniture, fixtures etc. in the home are worth about $7,000.
• Jeff and Mary have retirement accounts that have a current market value of approximately $200,000.
• Mary still has an education loan with an outstanding balance of $15,000. It still has seven years left on it.
• A vacation loan of $750 due in 6 months and a home improvement loan of $2,000 due in 2 years (unsecured - not a home equity loan.)
• Jeff wants to finish the basement and he has discussed this at length with Mary. He is getting estimates from contractors based on ideas that both he and Mary have to create a play area for the children and a TV/den for the family. Jeff and Mary love to play ping pong and pool and would love to introduce the children to both "sports." He believes that the project will cost about $30,000 and he is interested in tapping into the home equity.
• Jeff is also an avid baseball fan and is looking at buying a membership to a local baseball/softball facility for both Paul and Marcy. He figures that since he doesn't have any expensive hobbies, it would be fun to get Paul started as a baseball player and Marcy as a softball player. The membership costs and related costs are as follows: $1,500 per year (covers both kids), equipment $500 per year, and team registration and travel costs will be about another $1,000 to $2,000 a year depending on how serious the kids become. Mary is not sure that this is a priority at this point and wants to explore this possibility in more detail.

General instructions

Please read through the questions below and solve each requirement using the MS Excel workbook. The workbook includes a worksheet for each requirement (Question 1 Personal Balance Sheet, questions 2,3,4 Ratios, Question 5 Common Stock Portfolio, etc.).

Question 1. Mary understands that although the family doesnt maintain a formal accounting system to be able to produce a personal balance sheet, they do have records from which such a statement can be prepared. Mary knows that periodically, it would be wise to have a balance sheet that is up to date as the family may need it for a loan application, possibly for some investment opportunities, and for developing plans such as a personal financial plan, an estate plan or a formal retirement plan.

According to AICPAs Statement of Position 82-1 Accounting and Financial Reporting for Personal Financial Statements, personal financial statements should present assets at their estimated current values and liabilities at their estimated current amounts. The estimated current value of an asset in personal financial statements is the amount at which the item could be exchanged between a buyer and seller, each of whom is well informed and willing, and neither of whom is compelled to buy or sell.

What is the family's net worth? Please prepare a personal balance sheet. The balance sheet "as of date" should be Dec. 31, 2022. PLEASE NOTE: Because the family owns several common stock investments, it might be helpful to review question 5 (below) and complete the question 5 worksheet in the Excel workbook and then enter the appropriate balance sheet value from that portfolio report. Be sure to use the market values as of 12/31/22 for the stocks when preparing the balance sheet.

Question 2. The current ratio is a measure of short-term debt burden. A current ratio of 2 indicates that for every $2 of liquid assets there is $1 of current liabilities (a current ratio = 2). A high current ratio indicates the ability to meet short-term obligations. What is the current ratio on December 31^st for the Douglas family?

Question 3. Debt burden is something that every family should monitor. One ratio is a debt ratio (liabilities/assets). In recent years, the Douglas familys debt ratio was running around 40%. What is their current debt ratio?

Question 4. The liquidity ratio indicates the number of months that living expenses can be paid from liquid assets if an emergency arises (such as any event that would result in a serious decrease in income) If the family's monthly living expenses are about $6,000, what is their liquidity ratio?

Question 5. The familys stock portfolio is in an investment account. John and Mary log into the account periodically, to see how their investments are performing. Typically, common stocks by sectors such as:

• Communication Services
• Consumer Discretionary
• Consumer Staples
• Energy
• Financial
• Health Care
• Industrials
• Information Technology
• Materials
• Real Estate
• Utilities

Within the sectors, there are industries. Here is a summary of the familys portfolio in terms of sectors and industry:

Company Name	Stock Symbol	Sector	Industry
Apple	AAPL	Information Technology	Technology Hardware, Storage & Peripherals
AT&T	T	Communication Services	Diversified Telecommunication Services
Microsoft	MSFT	Information Technology	Software
Alphabet	GOOGL	Communication Services	Interactive Media & Services

What are your comments about the familys investment portfolio? Please keep in mind that their investment portfolio currently consists of common stocks. Be sure to summarize the portfolio holdings on the Question 5 sheet of the Excel workbook. To look up the market values, a web search should suffice. For example, Yahoo Finance provides historical per share market values of common stocks.

Question 6. Jeff Douglas believes strongly that they should help fully fund the equivalent of a state university education (4 years) for Paul and Marcy. Both sets of grandparents have volunteered to make a lump sum donation (50/50 spilt) to the mutual funds today. In other words, these generous grandparents have stated that they are willing to pool their funds and make a substantial deposit to support an education fund.

If today's cost of that type of college education is $25,000 per year and that it will inflate by 4% per year, how much must the grandparents donate to the mutual funds to fully fund these investments (to meet Jeff's goal)? (Assume that Paul and Marcy will start college in 12 and 11 years respectively. You will need to determine the present value of the future college costs. I have put a worksheet at the end of this document that you might find helpful. If you are an Excel user, you can set this up within an Excel worksheet.

Here are some steps to follow:

A. First by growing the cost of education by 4% per year (12 years into the future for Paul and 11 years for Marcy) and then calculating the present value of those future cash flows. Keep in mind that Paul will be going to school for 4 years and so too will Marcy. So, you will need to figure the future value of the cost of education for the first year, second year, third year, and fourth year - each year 4% more costly than the year before!

B. Calculate the present value of the future costs of education using the investment yield prediction (8% - see below and notice in the data above that the investment fund has averaged 8% per year).

C. Once you have the present value of the future costs - you can subtract the current balance in these accounts to derive the "donation" that the grandparents will need to make.) Assume that the investment will grow at 8% per year as a result of investment yields. How much (in total) must the grandparents invest today to establish the education fund for Paul and Marcy?

NOTE: There is more on how to approach solving question 6 at the end of this document.

Question 7. Calculate the percentage of net worth represented by the home and the two other largest assets. Consider any loans attributed to those assets so that you show the following - the assets net value/Total family net worth. Count both cars as one asset (Automobiles).

This is called the dominant asset other words, if a family is car rich then that would mean a significant percentage of their wealth (as defined by net worth) would be from the value of its cars. The cars would be the dominant asset. If the familys net worth is mostly from their retirement accounts, then we could say that a significant amount of their wealth is from pensions.

Question 8. Jeff is considering applying for a home equity loan to finance the basement project. What is the maximum home equity loan the Douglas' could possibly get based only on equity (and ignoring cash flow considerations)? Assume that a bank is willing to loan up to 80% of the value of the home (between the mortgage and the home equity loan).

Question 9. Home equity loans have many advantages. For example, the home equity loan may be the source of funds to help Jeff and Mary finish their basement. The interest on the loan will be tax deductible. The arrangement that Jeff and Mary are looking at will involve a 15-year payback period and would allow for them to draw down on any unused funds in a credit line arrangement.