Personal Financial Planning Cases & Applications Textbook 10th Edition 2017-2018 Today is January 1, 2017 Archie and Elaine Peyton have come to you, a financial planner, for help in developing a plan to accomplish their financial goals. From your initial meeting together, you have gathered the following information. Personal Background and Information Archie Peyton (Age 47) Archie Peyton is an executive in ABC Company, a closely held corporation. His current salary is $100,000, and he expects increases of 5% per year. Elaine Peyton (Age 50) Elaine Peyton is Archie's administrative assistant. Her present salary is $24,000 She expects raises of 5% per year. This is a second marriage for Elaine Her first husband, Jerry, died five years ago Elaine was the beneficiary of Jerry's $250,000 life insurance policy with which she cre- ated her investment portfolio The Peytons Archie and Elaine have been married for three years. They do not reside in a com- munity property state. The Children Elaine has two children from her first marriage, Jerry Jr, age 16, and Christopher, age 12. Archie and Elaine have one daughter, Kelsey, who is now 2 years old. All of the children live with them. The children are cared for during the day by their paternal grandmother who lives next door. When they were first married, Archie wanted to adopt Jerry Jr. and Christopher, but the children refused. Since then, Archie and the two boys have been in continual conflict. As a result, Elaine expects to use her investment portfolio to pay for the boys' education, without any assistance from Archie. Personal and Financial Objectives 1. The Peytons want to plan for their children's college education. They plan for each child to attend a private institution for five years beginning at age 18 with a cost of $25,000 a year per child (today cost). The expected educational inflation o B e @ WE 2. Archie and Elaine expect to need 80% of their current pretax income during retirement. Elaine would like to retire at age 65 and Archie at age 62. They both expect their retirement period to be 30 years. 3. Archie wants to review both his and Elaine's life insurance needs and have estate planning documents drafted for both of them. 4. They would like to minimize any death tax liability 5. Archie and Elaine plan to travel extensively during retirement. 6. They want to be debt free by the time they retire. 7. They want to pay off their credit card debt in the upcoming year. Economic Information Inflation has averaged 4% over the last 20 years. Inflation is expected to be 3.5% for the foreseeable future. (Assumed) Treasury Yield Curve 8 8 8 8 8 8 8 8 8 8 8 + 3 months 9 months 20 years so years Current Yields for Treasury Securities 3 Months 4.0% 6 Months 9 Months 4.5% 4.7% 1 Year 5.0% 3 Years 6.0% 5 Years 75% 10 Year 8.5% 20 Years 9.0% 25 Years 0.0% 30 Year 8.8% JUMLUDUchyl EVIFFICULT702013).par 96 Personal Financial Planning Cases & Applications Textbook 10th Edition 2017-2018 Current Mortgage Rates 8.75% for 30-year loans 8.25% for 15-year loans Closing costs of 3% will not be included in the refinancing of the existing mortgage Economic Outlook--Investments Expected Returns (Pretax) Expected Standard Deviation 15% 15% Agressive stocks Growth stocks 12% 10% 104 S&P 500 Index Corporate bonds Money markets 90-day T-bills Insurance Information Life Insurance Polly A Policy Policy C Policy Insured Owner Archie Beneficiary Archie's mother state of Archie Jerry & Christopher equally $48000 Christopher equally 550.000 Original amount $200.000 $100 000 Policy type Group term Group Term 30-year decreasing term Moded premium whole le Cash value so $0 $100 5250 $420 Annual premium Premium payor Date purchased Archie Employer Any 2008 Current coverage 200 000 575000 | O Ate - 98 Personal Financial Planning Cases & Applications Textbook 10th Edition 2017-2018 Scheduled Personal Property Endorsement This Endorsement Changes the Policy. Please Read Carefully. For an additional premium, we cover the classes of personal property indicated by an amount of insurance. This coverage is subject to the DEFINITION, SECTION 1-CONDITIONS, SECTIONS AND CONDITIONS and all provisions of this endorsement. The Section I deductible as shown on the Declarations does not apply to this coverage. Premium Amount of Insurance $10,000 $30 Class of Personal Property 1. Jewelry, as scheduled 2. Furs and garments trimmed with fur or consisting principally of fur, as scheduled Same as 1 3. $5.000 Cameras, projection machines, films, and related articles of equipment, as listed Musical Instruments and related articles of equipment, as listed. You agree not to perform with these instruments for pay unless specifically provided under this policy Silverware, silver-plated ware. goldware, gold plated ware, and pewterware, but excluding pens pencils, flasks, smoking implements, o jewelry Golfer's equipment meaning golf clubs, golf clothing, and golf equipment. 6 7. Fine arts, as scheduled. This premium is based on your statement that the property insured is located at the following address 8. Postage stamps 9. Rare and current coins o te xwe Case 7 Archie and Elaine Peyton 9 SCHEDULE Amount of Article Description Insurance Diamond Bracelet 12 pure 173k diamonds, 14k white gold setting $3,000 Diamond Necklace 78 14k gold chain, pure 2k diamond pendant 57,000 T-Max 90 35 mm body $ 500 3002 lens $3,000 Hasenbladt camera body - 2 lens $1,500 THE AMOUNTS SHOWN FOR EACH ITEM IN THE SCHEDULE ARE LIMITED BY CONDITION 2. LOSS SETTLEMENT ON PAGE 3 OF THIS ENDORSEMENT Entries may be left blank if shown elsewhere in this policy for this coverage HO 04 61 04 91 Automobile Insurance PERSONAL AUTO POLICY DECLARATIONS PAGE COVERAGES Semiannual Premium Auto 2 $400 Auto 1 $100,000/$300,000 $10.000 $100,000/$300,000 $100.000/5300,000 $10.000 $100,000/$300,000 $100 $150 Part A Liability Part - Medical payments Part -Uninsured motorists Part D-Damage to your auto Collision Other than collision Towing and labor Total semiannual premium $500 deductible $250 deductible $100 maximum 5500 deductible $250 deductible S100 maximum $100 $70 $ 10 SR30 Investment Information During Elaine's marriage to Jerry, an education fund was established for both Jerry It and Christopher. Since Jerry died, Elaine has no longer contributed to this fund. A the present time, the find balance is $22,747. The money has been invested at 6%, and the Peytons have the option of renewing the short-term certificate of deposit (CD) in April at an interest rate of 4%. When Elaine received the life insurance proceeds of $250.000 from Jerry death shewked a broker to help her manage the money. Her broker, John, placed her funds 100 Personal Financial Planning Cases & Applications Textbook 100 ditin 2017-2018 in an investment Count wer which he has full discretion. John's record regarding Elaine's investment portfolio over the last five years is as follows. 2012 2013 2014 2015 2016 Load-adjusted total return (100) (8.5) 12.0 3.0 Elaine did not have the information for 2013 and has been unable to obtain it from John Elaine considers herself to be a conservative to moderate investor and has little experience or education in investments. Archie believes that he is a more moderate investor, and he has more experience with investments than Elaine. Income Tax Information The Peytons are in the 25% marginal tax bracket fpe federal income tax and 6% for state income tax Retirement Information Both Elaine and Archie plan to retire when Elaine turns 65. They expect their retirement portfolio to earn a 10% pretax average annual rate of return. They also expect their retirement period to last 30 years. Social Security retirement benefits for Archie are expected to be $26,000 annually at age 67, while Elaine's Social Security benefit will be 9,600 annually at age 67. Archie has not contributed to the traditional IRA in several years ABC Company sponsor a profit-sharing plan with a Section 401(k) feature. The Section 401(k) component of the plan allows participants to defer up to 20% of salary. The plan also matches $0.50 for every doll contributed, up to 6% of salary: Neither Archie nor Elaine has ever made deferrals to the plan, but both have vested balances in the plan, as follows. Vested Balance as of January 1, 2017 S80.000 $12.000 The plan allows participants to self-direct their retirement plan ases through the choice of various mutual funds ABC Company has recently established a phantom sock plan in which Archie is a participant. Archie's interest is 1% of ABC as of year-end 2016. o Be @ The investment options for the retirement plan are as follows. XYZ Small Company Growth Fund Fund objective: The Fund seeks long-term growth of capital Portfolio concept The Fund invests primarily in common stock of small-and medium- size companies that are early in their life cycle and have the potential to become major enterprises Fund objective: Portfolio concept Fund objective: Portfolio concept XYZ Growth Fund The Fund seeks growth of capital and, secondarily, income The Fund seeks to invest in equity securities stocks) placing primary emphasis on those securities that Fund Management believes to be undervalued. The Fund may invest up to 20% in foreign securities. XYZ Index Fund The Fund seeks to approximate the total return of the S&P 500 Index The Fund invests primarily in a portfolio of equity securities (stock) that are included in the S&P 500 Index XYZ Foreign Fund The Fund seeks long-term capital growth through investments in stocks and debt obligations of companies and governments outside the United States. The Fund generally invests in common stocks, however, it may also invest in preferred stocks and certain debt securities, rated or unrated, such as convertible bonds and bonds selling at a discount XY2 Balanced Fund Fund objective: Portfolio concept: Fund objective: Portfolio concept The Fund seeks the highest total investment return consistent with prudent risk The Fund has a fully managed investment policy utilizing equity debt, and convertible securities Fund objective: XYZ Income Fund The Fund seeks a high level of income, consistent with the prudent investment of capital, through a flexible investment program emphasizing high-grade bonds The Fund invests primarily in a broad range of high-grade, income producing securities, such as corporate bonds and government securities Portfolio concept Fund objective: Portfolio concept XYZ Money Market Fund The Fund seeks preservation of capital current income, and liquidity The Fund is a money market mutual fund that seeks capital preservation, current income, and liquidity through investment in a portfolio of high-quality short-term money market instruments. induding securities is issued by the US governmentits agencies, or Instrumentalities 102 Personal Financial Planning Cases & Applications Textbook 10th Edition 2017-2018 The company has made the following profit-sharing contributions to the retire- ment plan for Archie and Elaine for each of the related years. Archie Elaine None None 2017 2016 $15.000 $3,600 $ 0 2015 2014 $13.505 $3.265 2013 $10,366 $2.4RR 2012 $2,369 $8.954 $25,000 Balance 1/1/12 All contributions are made December 31 of the indicated year. ANNUALIZED RETURNS OF RETIREMENT FUNDS 2006 2007 2014 2015 XYZ Small Co. Growth Fund 40% 41.14% 15.01% XYZ Growth Fund - 3264 x 25.20 9.97% 32.37% 36.82% 14.504 XYZ Index Trust 9.66% 102 XYZ Foreign Fund 28.77% 249 21 99% 2053% 035 XYZ Balanced 19 % 4.60% 17.04% 22 % 10% 24.69% 50% 1% 0.91% XYZ Income Fund 1425% 0.74% 89% 12.75% 83% 17.32% 6.74% 12.5% -1.43% XYZ Money Market and 4215 3 4 .01% 50% 5.40% 4.75% 0% 25% 6,01% 71% Gifts, Estates, Trusts, and Will Information They do not have any estate planning documents at this time. 20 STATEMENT OF CASH FLOWS Archie and Elaine Peyton For January 1, 2016 to December 31, 2016 (Projected to be similar for 2017) CASH INFLOWS Salaries Archie $100,000 Elaine 24,000 Total salaries $124,000 Investment income ML Brokerage Account $ 3,050 Elaine's investment portfolio 4.771 Savings account 618 Elaine's education fund 1.062 Investment income S 9.501 Total cash inflows CASH OUTFLOWS Living expenses Food $ 4,300 Clothing 4,000 Entertainment Utilities, cable, and phone S000 Auto maintenance 1,200 Church 2.000 Home mortgage 14.934 Auto loans 18.818 Credit card 4,300 Total living expenses $ 61,052 Insurance Health 5 2.400 Auto 1,660 $133.501 6,500 Life Homeowners with endorsements Disability Total insurance 950 1,677 $ 7.207 Property Cresidence) Federal income (withholding State income Payroll (FICA (Schedule 1) $ 4,452 36,840 4.000 9.486 5 54,778 Total taxes Total cash outflows Net cash flow (surplus) $123,037 $10.464 04 Personal Financial Planning: Cases & Applications Textbook 10th Edition 2017-2018 Schedule 1: Payroll Taxes Old-Age, Survivors, and Disability Insurance Archie $100,000 X 6.2% = $6,200 Elaine $ 24,000 6.2% = $1,488 $7,688 Medicare Archie Elaine $100,000 x 1.45% 524.000 x 1.45% = = $1,450 $348 $1,798 $9.486 Total Tax Rate 2016 Payroll Tax Limits Income 5118,500 Unlimited QASD 6.2% Medicare 1.45% T UTULU).pu Case 7 Archie and Elaine Peyton 105 STATEMENT OF FINANCIAL POSITION Archie and Elaine Peyton As of January 1, 2017 Assets Liabilities and Net Worth Liquid assets Short-term liabilities Checking $ 7.500 52 Credit cards $ 4,300 Savings 15.450 Total liquid assets $ 22.950 Long-term liabilities Invested assets Home mortgage $144,981 First Mutual Growth Funds $ 7,950 51/52 Auto loans 40,069 ML Brokerage Account 100,000 51 Margin loan 7,500 Elaine's investment portfolio 210.000 Total long-term 5192,550 Elaine's education fund 22,747 Archie's vested retirement plan 80,000 Total liabilities $196,850 account Elaine's vested retirement plan 12.000 account Archie's individual retirement 9,000 account CRAY" Total invested assets $441,697 Use assets Home $185,000 Net worth $552,797 32,000 21.000 Boat 10.000 Furs and jewelry 10.000 Furniture and household 27.000 Total use assets $285,000 Total liabilities Total assets 5749.642 and net worth $749,647 Truck EOE Als we dat mare be weated a principal only "The che continebangan The wing account 4 per year of fund Account stated to , which do not include Men for M epe Acount A RAS di Dalodbank misle designations 51 Ad property I wthorwap a 500 500 106 Personal Financial Planning Cases & Applications Textbook 10th Edition 2017-2018 Information Regarding Assets and Liabilities Investment Income ML Brokerage Account Money market Bonds $ 300 3,350 (600) $3,050 Marginnterest Elaine's investment portfolio Bonds Stocks $1,300 3,471 $4,771 $ 618 51,062 $9.501 Savings account Elaine's education fund TOTAL House January 1, 2014 (purchase) $185.000 Principal residence Fair market value (current Original loan Term $149,000 30 years 95% Interest rate 51 244 46 Monthly payment Remaining mortgage Remaining term $144.981 27 years Boat The boat is a 90-horsepower fishing bout that was originally bought for $10,000 and is owned outright. Automobiles Archie's 2015 Truck $40.000 $35.000 Purchase price Down payment Term Interest rate Monthly payment Payments remaining Outstanding balance 561032 $28,677.07 $11.39223 Ofte WT Case 7 I Archie and Elaine Peyton 10 ML Brokerage Account Account Name: Archie Peyton Account Number: AB100402 Price/share 100 Balances Shares 6,667.00 Coupon 75% Money Market Money market Bonds $10,000 US Treasury note $15,000 U.S. Treasury bond $50,000 US Treasury bond $20,000 Davidson debenture Maturity 60% 0.0% 8.5% Current Yield 45% Cost Basis 510,351.18 13,138 64 4.093.40 17.45593 545,039.15 Cost Basis 510,000 6,750 11.250 $28.000 Fair Market Value 56.667.00 Fair Market Value $10,000.00 10,579 83 3.982.02 16288.44 540,850 29 Fair Market Value $10,400 7.275 13,000 $30.675 Shares 2000 Stocks Stock 1 Stock 2 Stock 3 Price/ share 5 5.20 $ 4.85 $26 00 1.500 Shares Cost Basis These stocks do not currently pay dividends. Mutual Funds Price/share Emerging growth fund $21.00 Balanced fund $18.00 Municipal bond fund $12.00 $12.250 Fair Market Value $10.500 7,650 8.925 N 3.000 $24.625 $21,150 Note: All distributions from these funds are reinvested Number of Options Contracts Exercise Price Options Stock 2 call options Stock 3 put options Option Premium $3.00 $5.00 Option Expiration July 2017 March 2017 $ 5.50 $24.00 Fair Market Value $486 37 5171.34 5657.71 $100,000 12.500 $99.500 TOTAL ACCOUNT VALUE MARGIN LOAN BALANCE NET ACCOUNT VALUE O BE e First Mutual Growth Fund Account Name: Archie Peyton Account Number: AB100357 Transaction Amount Total Shares Total Value Shares 525.00 100 Buy Buy Date 04/01/15 08/01/15 12/01/15 5 2.500 $ 4,000 $ 500 $ 3.000 $20.00 $12.50 Reinvest dividend Buy 02/01/16 $15.00 100 300 340 540 640 700 260 $ 2.500 56,000 5 4250 58,100 512,800 $17.500 $ 7,020 Buy 04/01/16 $ 2,000 520.00 Buy 06/01/16 $ 1,500 $25.00 $27.00 $27.00 Sell 12/01/16 511880 Reinvest dividend 12/01/16 51,080 BALANCE 12/31/16 Note: All distributions from this fundamente 300 300 $ 8,100 57,950 $26.50 Elaine's Investment Portfolio Bonds Current Fair Market Value Duration 10 $10.000 $10,000 U.S. Treasury bonds $5,000 U.S. Treasury bonds 20 7.12 years 9.95 years Total value of bonds $ 5.000 $15.000 Stocks P/E Fair Market Value Ratio S3000 Shares 1,000 575 200 500 1,000 1.250 Stock Stock A Stock B Stock C Stock D Stock E Stock F X 6 % 11% 7% 3% 25% 22% Beta 0.65 0.75 0.65 0.70 0.95 1,10 11% 9% 10% 75% 65% 3096 13.0 14,0 15.1 Dividend Yield Basis 30 530,000 3.7% $45.000 37 $20 000 00% $11.000 0.0% $20,000 00% $23.000 Total value of stocks S8.500 $ 18,000 15% 18% 70% 20% 144 11.1 $ 25.000 $152.500 Case 7 Archie and Elaine Peyton 109 Mutual Funds Front-End Expense Ratio Fair Market Value X Alpha Basis 71% $ 2.500 $ 2.625 10% 14% 11.5% 6% 55,000 Shares 210 300 443 1.000 320 410 5 5.100 Mual Fund Style Fund A MG Fund B LG Fund C MV Fund D MG Fund E G Fund F 1 (4%) 225% $10.000 $11.075 0.70 $7.500 6% 4% % (10%) (3%) 2.5%) 5% 60% 1.85% 58,000 1.75% 59.500 1.5% $10,000 Total value of mutual funds 7 09 3% 78% S 8,000 S 8.200 $42,500 Note: All dibutions from the mutual funds w e stes TOTAL PORTFOLIO VALUE $210,000 5-year average return Standard deviation Coefficient of determination Medium Growth Case Study #2 Questions Archie and Elaine Peyton 1. List the Peytons' financial strengths and weaknesses. 2. After reading the case, what additional information would you request from the Peytons to complete your data-gathering phase? 3. As of December 1, 2016, what is the internal rate of return for the First Mutual Growth Fund since the Peytons' first purchase on April 1, 2015? 4. What is the holding period return (HPR) for Elaine's stock portfolio portion held in her investment portfolio? 5. Comment on the allocation of mutual funds in Elain's investment portfolio. 6. Comment on the portfolio allocation for Archie's MI brokerage account. 7. What is the weighted duration of the bond portfolio portion of Elaine's investment portfolio? 8. What is the taxable gain on the sale of the 440 shares of First Mutual Growth Fund (12/1/16), and how will it be classified for income tax purposes? Assume that the tax basis in the shares sold is determined by using the first in, first out (FIFO) method. 9. As of January 1, 2017, what is the average cost per share for the shares remaining of First Mutual Growth Fund, assuming the FIFO method was used for determining the sale of the 440 shares sold? 10. Elaine wants to know how much she and Archie need to contribute over the next 15 years for Kelsey's education. Their first contribution will be in one year, and they will invest in a portfolio that is split equally between the S&P 500 index and 5-year treasury bonds. This allocation will be maintained by rebalancing the account every 12 months. Assume any tax on earnings will be paid from their income, and not from the education funds. 11. What do the Peytons need to do now to meet their retirement income goal? They do not want to consider Social Security benefits in their retirement planning, 12. Discuss the Peytons' current life insurance situation 13. How much of their current gross income, in dollars and percentages, are the Peytons currently saving toward their retirement goal? 14. What is the weighted beta of Elaine's mutual funds located in her investment portfolio? 15. What are the Peytons' current estate planning deficiencies? o te xwi 11% A Personal Financial Planning Cases & Applications Textbook 10th Edition 2017-2018 Today is January 1, 2017 Archie and Elaine Peyton have come to you, a financial planner, for help in developing a plan to accomplish their financial goals. From your initial meeting together, you have gathered the following information. Personal Background and Information Archie Peyton (Age 47) Archie Peyton is an executive in ABC Company, a closely held corporation. His current salary is $100,000, and he expects increases of 5% per year. Elaine Peyton (Age 50) Elaine Peyton is Archie's administrative assistant. Her present salary is $24,000 She expects raises of 5% per year. This is a second marriage for Elaine Her first husband, Jerry, died five years ago Elaine was the beneficiary of Jerry's $250,000 life insurance policy with which she cre- ated her investment portfolio The Peytons Archie and Elaine have been married for three years. They do not reside in a com- munity property state. The Children Elaine has two children from her first marriage, Jerry Jr, age 16, and Christopher, age 12. Archie and Elaine have one daughter, Kelsey, who is now 2 years old. All of the children live with them. The children are cared for during the day by their paternal grandmother who lives next door. When they were first married, Archie wanted to adopt Jerry Jr. and Christopher, but the children refused. Since then, Archie and the two boys have been in continual conflict. As a result, Elaine expects to use her investment portfolio to pay for the boys' education, without any assistance from Archie. Personal and Financial Objectives 1. The Peytons want to plan for their children's college education. They plan for each child to attend a private institution for five years beginning at age 18 with a cost of $25,000 a year per child (today cost). The expected educational inflation o B e @ WE 2. Archie and Elaine expect to need 80% of their current pretax income during retirement. Elaine would like to retire at age 65 and Archie at age 62. They both expect their retirement period to be 30 years. 3. Archie wants to review both his and Elaine's life insurance needs and have estate planning documents drafted for both of them. 4. They would like to minimize any death tax liability 5. Archie and Elaine plan to travel extensively during retirement. 6. They want to be debt free by the time they retire. 7. They want to pay off their credit card debt in the upcoming year. Economic Information Inflation has averaged 4% over the last 20 years. Inflation is expected to be 3.5% for the foreseeable future. (Assumed) Treasury Yield Curve 8 8 8 8 8 8 8 8 8 8 8 + 3 months 9 months 20 years so years Current Yields for Treasury Securities 3 Months 4.0% 6 Months 9 Months 4.5% 4.7% 1 Year 5.0% 3 Years 6.0% 5 Years 75% 10 Year 8.5% 20 Years 9.0% 25 Years 0.0% 30 Year 8.8% JUMLUDUchyl EVIFFICULT702013).par 96 Personal Financial Planning Cases & Applications Textbook 10th Edition 2017-2018 Current Mortgage Rates 8.75% for 30-year loans 8.25% for 15-year loans Closing costs of 3% will not be included in the refinancing of the existing mortgage Economic Outlook--Investments Expected Returns (Pretax) Expected Standard Deviation 15% 15% Agressive stocks Growth stocks 12% 10% 104 S&P 500 Index Corporate bonds Money markets 90-day T-bills Insurance Information Life Insurance Polly A Policy Policy C Policy Insured Owner Archie Beneficiary Archie's mother state of Archie Jerry & Christopher equally $48000 Christopher equally 550.000 Original amount $200.000 $100 000 Policy type Group term Group Term 30-year decreasing term Moded premium whole le Cash value so $0 $100 5250 $420 Annual premium Premium payor Date purchased Archie Employer Any 2008 Current coverage 200 000 575000 | O Ate - 98 Personal Financial Planning Cases & Applications Textbook 10th Edition 2017-2018 Scheduled Personal Property Endorsement This Endorsement Changes the Policy. Please Read Carefully. For an additional premium, we cover the classes of personal property indicated by an amount of insurance. This coverage is subject to the DEFINITION, SECTION 1-CONDITIONS, SECTIONS AND CONDITIONS and all provisions of this endorsement. The Section I deductible as shown on the Declarations does not apply to this coverage. Premium Amount of Insurance $10,000 $30 Class of Personal Property 1. Jewelry, as scheduled 2. Furs and garments trimmed with fur or consisting principally of fur, as scheduled Same as 1 3. $5.000 Cameras, projection machines, films, and related articles of equipment, as listed Musical Instruments and related articles of equipment, as listed. You agree not to perform with these instruments for pay unless specifically provided under this policy Silverware, silver-plated ware. goldware, gold plated ware, and pewterware, but excluding pens pencils, flasks, smoking implements, o jewelry Golfer's equipment meaning golf clubs, golf clothing, and golf equipment. 6 7. Fine arts, as scheduled. This premium is based on your statement that the property insured is located at the following address 8. Postage stamps 9. Rare and current coins o te xwe Case 7 Archie and Elaine Peyton 9 SCHEDULE Amount of Article Description Insurance Diamond Bracelet 12 pure 173k diamonds, 14k white gold setting $3,000 Diamond Necklace 78 14k gold chain, pure 2k diamond pendant 57,000 T-Max 90 35 mm body $ 500 3002 lens $3,000 Hasenbladt camera body - 2 lens $1,500 THE AMOUNTS SHOWN FOR EACH ITEM IN THE SCHEDULE ARE LIMITED BY CONDITION 2. LOSS SETTLEMENT ON PAGE 3 OF THIS ENDORSEMENT Entries may be left blank if shown elsewhere in this policy for this coverage HO 04 61 04 91 Automobile Insurance PERSONAL AUTO POLICY DECLARATIONS PAGE COVERAGES Semiannual Premium Auto 2 $400 Auto 1 $100,000/$300,000 $10.000 $100,000/$300,000 $100.000/5300,000 $10.000 $100,000/$300,000 $100 $150 Part A Liability Part - Medical payments Part -Uninsured motorists Part D-Damage to your auto Collision Other than collision Towing and labor Total semiannual premium $500 deductible $250 deductible $100 maximum 5500 deductible $250 deductible S100 maximum $100 $70 $ 10 SR30 Investment Information During Elaine's marriage to Jerry, an education fund was established for both Jerry It and Christopher. Since Jerry died, Elaine has no longer contributed to this fund. A the present time, the find balance is $22,747. The money has been invested at 6%, and the Peytons have the option of renewing the short-term certificate of deposit (CD) in April at an interest rate of 4%. When Elaine received the life insurance proceeds of $250.000 from Jerry death shewked a broker to help her manage the money. Her broker, John, placed her funds 100 Personal Financial Planning Cases & Applications Textbook 100 ditin 2017-2018 in an investment Count wer which he has full discretion. John's record regarding Elaine's investment portfolio over the last five years is as follows. 2012 2013 2014 2015 2016 Load-adjusted total return (100) (8.5) 12.0 3.0 Elaine did not have the information for 2013 and has been unable to obtain it from John Elaine considers herself to be a conservative to moderate investor and has little experience or education in investments. Archie believes that he is a more moderate investor, and he has more experience with investments than Elaine. Income Tax Information The Peytons are in the 25% marginal tax bracket fpe federal income tax and 6% for state income tax Retirement Information Both Elaine and Archie plan to retire when Elaine turns 65. They expect their retirement portfolio to earn a 10% pretax average annual rate of return. They also expect their retirement period to last 30 years. Social Security retirement benefits for Archie are expected to be $26,000 annually at age 67, while Elaine's Social Security benefit will be 9,600 annually at age 67. Archie has not contributed to the traditional IRA in several years ABC Company sponsor a profit-sharing plan with a Section 401(k) feature. The Section 401(k) component of the plan allows participants to defer up to 20% of salary. The plan also matches $0.50 for every doll contributed, up to 6% of salary: Neither Archie nor Elaine has ever made deferrals to the plan, but both have vested balances in the plan, as follows. Vested Balance as of January 1, 2017 S80.000 $12.000 The plan allows participants to self-direct their retirement plan ases through the choice of various mutual funds ABC Company has recently established a phantom sock plan in which Archie is a participant. Archie's interest is 1% of ABC as of year-end 2016. o Be @ The investment options for the retirement plan are as follows. XYZ Small Company Growth Fund Fund objective: The Fund seeks long-term growth of capital Portfolio concept The Fund invests primarily in common stock of small-and medium- size companies that are early in their life cycle and have the potential to become major enterprises Fund objective: Portfolio concept Fund objective: Portfolio concept XYZ Growth Fund The Fund seeks growth of capital and, secondarily, income The Fund seeks to invest in equity securities stocks) placing primary emphasis on those securities that Fund Management believes to be undervalued. The Fund may invest up to 20% in foreign securities. XYZ Index Fund The Fund seeks to approximate the total return of the S&P 500 Index The Fund invests primarily in a portfolio of equity securities (stock) that are included in the S&P 500 Index XYZ Foreign Fund The Fund seeks long-term capital growth through investments in stocks and debt obligations of companies and governments outside the United States. The Fund generally invests in common stocks, however, it may also invest in preferred stocks and certain debt securities, rated or unrated, such as convertible bonds and bonds selling at a discount XY2 Balanced Fund Fund objective: Portfolio concept: Fund objective: Portfolio concept The Fund seeks the highest total investment return consistent with prudent risk The Fund has a fully managed investment policy utilizing equity debt, and convertible securities Fund objective: XYZ Income Fund The Fund seeks a high level of income, consistent with the prudent investment of capital, through a flexible investment program emphasizing high-grade bonds The Fund invests primarily in a broad range of high-grade, income producing securities, such as corporate bonds and government securities Portfolio concept Fund objective: Portfolio concept XYZ Money Market Fund The Fund seeks preservation of capital current income, and liquidity The Fund is a money market mutual fund that seeks capital preservation, current income, and liquidity through investment in a portfolio of high-quality short-term money market instruments. induding securities is issued by the US governmentits agencies, or Instrumentalities 102 Personal Financial Planning Cases & Applications Textbook 10th Edition 2017-2018 The company has made the following profit-sharing contributions to the retire- ment plan for Archie and Elaine for each of the related years. Archie Elaine None None 2017 2016 $15.000 $3,600 $ 0 2015 2014 $13.505 $3.265 2013 $10,366 $2.4RR 2012 $2,369 $8.954 $25,000 Balance 1/1/12 All contributions are made December 31 of the indicated year. ANNUALIZED RETURNS OF RETIREMENT FUNDS 2006 2007 2014 2015 XYZ Small Co. Growth Fund 40% 41.14% 15.01% XYZ Growth Fund - 3264 x 25.20 9.97% 32.37% 36.82% 14.504 XYZ Index Trust 9.66% 102 XYZ Foreign Fund 28.77% 249 21 99% 2053% 035 XYZ Balanced 19 % 4.60% 17.04% 22 % 10% 24.69% 50% 1% 0.91% XYZ Income Fund 1425% 0.74% 89% 12.75% 83% 17.32% 6.74% 12.5% -1.43% XYZ Money Market and 4215 3 4 .01% 50% 5.40% 4.75% 0% 25% 6,01% 71% Gifts, Estates, Trusts, and Will Information They do not have any estate planning documents at this time. 20 STATEMENT OF CASH FLOWS Archie and Elaine Peyton For January 1, 2016 to December 31, 2016 (Projected to be similar for 2017) CASH INFLOWS Salaries Archie $100,000 Elaine 24,000 Total salaries $124,000 Investment income ML Brokerage Account $ 3,050 Elaine's investment portfolio 4.771 Savings account 618 Elaine's education fund 1.062 Investment income S 9.501 Total cash inflows CASH OUTFLOWS Living expenses Food $ 4,300 Clothing 4,000 Entertainment Utilities, cable, and phone S000 Auto maintenance 1,200 Church 2.000 Home mortgage 14.934 Auto loans 18.818 Credit card 4,300 Total living expenses $ 61,052 Insurance Health 5 2.400 Auto 1,660 $133.501 6,500 Life Homeowners with endorsements Disability Total insurance 950 1,677 $ 7.207 Property Cresidence) Federal income (withholding State income Payroll (FICA (Schedule 1) $ 4,452 36,840 4.000 9.486 5 54,778 Total taxes Total cash outflows Net cash flow (surplus) $123,037 $10.464 04 Personal Financial Planning: Cases & Applications Textbook 10th Edition 2017-2018 Schedule 1: Payroll Taxes Old-Age, Survivors, and Disability Insurance Archie $100,000 X 6.2% = $6,200 Elaine $ 24,000 6.2% = $1,488 $7,688 Medicare Archie Elaine $100,000 x 1.45% 524.000 x 1.45% = = $1,450 $348 $1,798 $9.486 Total Tax Rate 2016 Payroll Tax Limits Income 5118,500 Unlimited QASD 6.2% Medicare 1.45% T UTULU).pu Case 7 Archie and Elaine Peyton 105 STATEMENT OF FINANCIAL POSITION Archie and Elaine Peyton As of January 1, 2017 Assets Liabilities and Net Worth Liquid assets Short-term liabilities Checking $ 7.500 52 Credit cards $ 4,300 Savings 15.450 Total liquid assets $ 22.950 Long-term liabilities Invested assets Home mortgage $144,981 First Mutual Growth Funds $ 7,950 51/52 Auto loans 40,069 ML Brokerage Account 100,000 51 Margin loan 7,500 Elaine's investment portfolio 210.000 Total long-term 5192,550 Elaine's education fund 22,747 Archie's vested retirement plan 80,000 Total liabilities $196,850 account Elaine's vested retirement plan 12.000 account Archie's individual retirement 9,000 account CRAY" Total invested assets $441,697 Use assets Home $185,000 Net worth $552,797 32,000 21.000 Boat 10.000 Furs and jewelry 10.000 Furniture and household 27.000 Total use assets $285,000 Total liabilities Total assets 5749.642 and net worth $749,647 Truck EOE Als we dat mare be weated a principal only "The che continebangan The wing account 4 per year of fund Account stated to , which do not include Men for M epe Acount A RAS di Dalodbank misle designations 51 Ad property I wthorwap a 500 500 106 Personal Financial Planning Cases & Applications Textbook 10th Edition 2017-2018 Information Regarding Assets and Liabilities Investment Income ML Brokerage Account Money market Bonds $ 300 3,350 (600) $3,050 Marginnterest Elaine's investment portfolio Bonds Stocks $1,300 3,471 $4,771 $ 618 51,062 $9.501 Savings account Elaine's education fund TOTAL House January 1, 2014 (purchase) $185.000 Principal residence Fair market value (current Original loan Term $149,000 30 years 95% Interest rate 51 244 46 Monthly payment Remaining mortgage Remaining term $144.981 27 years Boat The boat is a 90-horsepower fishing bout that was originally bought for $10,000 and is owned outright. Automobiles Archie's 2015 Truck $40.000 $35.000 Purchase price Down payment Term Interest rate Monthly payment Payments remaining Outstanding balance 561032 $28,677.07 $11.39223 Ofte WT Case 7 I Archie and Elaine Peyton 10 ML Brokerage Account Account Name: Archie Peyton Account Number: AB100402 Price/share 100 Balances Shares 6,667.00 Coupon 75% Money Market Money market Bonds $10,000 US Treasury note $15,000 U.S. Treasury bond $50,000 US Treasury bond $20,000 Davidson debenture Maturity 60% 0.0% 8.5% Current Yield 45% Cost Basis 510,351.18 13,138 64 4.093.40 17.45593 545,039.15 Cost Basis 510,000 6,750 11.250 $28.000 Fair Market Value 56.667.00 Fair Market Value $10,000.00 10,579 83 3.982.02 16288.44 540,850 29 Fair Market Value $10,400 7.275 13,000 $30.675 Shares 2000 Stocks Stock 1 Stock 2 Stock 3 Price/ share 5 5.20 $ 4.85 $26 00 1.500 Shares Cost Basis These stocks do not currently pay dividends. Mutual Funds Price/share Emerging growth fund $21.00 Balanced fund $18.00 Municipal bond fund $12.00 $12.250 Fair Market Value $10.500 7,650 8.925 N 3.000 $24.625 $21,150 Note: All distributions from these funds are reinvested Number of Options Contracts Exercise Price Options Stock 2 call options Stock 3 put options Option Premium $3.00 $5.00 Option Expiration July 2017 March 2017 $ 5.50 $24.00 Fair Market Value $486 37 5171.34 5657.71 $100,000 12.500 $99.500 TOTAL ACCOUNT VALUE MARGIN LOAN BALANCE NET ACCOUNT VALUE O BE e First Mutual Growth Fund Account Name: Archie Peyton Account Number: AB100357 Transaction Amount Total Shares Total Value Shares 525.00 100 Buy Buy Date 04/01/15 08/01/15 12/01/15 5 2.500 $ 4,000 $ 500 $ 3.000 $20.00 $12.50 Reinvest dividend Buy 02/01/16 $15.00 100 300 340 540 640 700 260 $ 2.500 56,000 5 4250 58,100 512,800 $17.500 $ 7,020 Buy 04/01/16 $ 2,000 520.00 Buy 06/01/16 $ 1,500 $25.00 $27.00 $27.00 Sell 12/01/16 511880 Reinvest dividend 12/01/16 51,080 BALANCE 12/31/16 Note: All distributions from this fundamente 300 300 $ 8,100 57,950 $26.50 Elaine's Investment Portfolio Bonds Current Fair Market Value Duration 10 $10.000 $10,000 U.S. Treasury bonds $5,000 U.S. Treasury bonds 20 7.12 years 9.95 years Total value of bonds $ 5.000 $15.000 Stocks P/E Fair Market Value Ratio S3000 Shares 1,000 575 200 500 1,000 1.250 Stock Stock A Stock B Stock C Stock D Stock E Stock F X 6 % 11% 7% 3% 25% 22% Beta 0.65 0.75 0.65 0.70 0.95 1,10 11% 9% 10% 75% 65% 3096 13.0 14,0 15.1 Dividend Yield Basis 30 530,000 3.7% $45.000 37 $20 000 00% $11.000 0.0% $20,000 00% $23.000 Total value of stocks S8.500 $ 18,000 15% 18% 70% 20% 144 11.1 $ 25.000 $152.500 Case 7 Archie and Elaine Peyton 109 Mutual Funds Front-End Expense Ratio Fair Market Value X Alpha Basis 71% $ 2.500 $ 2.625 10% 14% 11.5% 6% 55,000 Shares 210 300 443 1.000 320 410 5 5.100 Mual Fund Style Fund A MG Fund B LG Fund C MV Fund D MG Fund E G Fund F 1 (4%) 225% $10.000 $11.075 0.70 $7.500 6% 4% % (10%) (3%) 2.5%) 5% 60% 1.85% 58,000 1.75% 59.500 1.5% $10,000 Total value of mutual funds 7 09 3% 78% S 8,000 S 8.200 $42,500 Note: All dibutions from the mutual funds w e stes TOTAL PORTFOLIO VALUE $210,000 5-year average return Standard deviation Coefficient of determination Medium Growth Case Study #2 Questions Archie and Elaine Peyton 1. List the Peytons' financial strengths and weaknesses. 2. After reading the case, what additional information would you request from the Peytons to complete your data-gathering phase? 3. As of December 1, 2016, what is the internal rate of return for the First Mutual Growth Fund since the Peytons' first purchase on April 1, 2015? 4. What is the holding period return (HPR) for Elaine's stock portfolio portion held in her investment portfolio? 5. Comment on the allocation of mutual funds in Elain's investment portfolio. 6. Comment on the portfolio allocation for Archie's MI brokerage account. 7. What is the weighted duration of the bond portfolio portion of Elaine's investment portfolio? 8. What is the taxable gain on the sale of the 440 shares of First Mutual Growth Fund (12/1/16), and how will it be classified for income tax purposes? Assume that the tax basis in the shares sold is determined by using the first in, first out (FIFO) method. 9. As of January 1, 2017, what is the average cost per share for the shares remaining of First Mutual Growth Fund, assuming the FIFO method was used for determining the sale of the 440 shares sold? 10. Elaine wants to know how much she and Archie need to contribute over the next 15 years for Kelsey's education. Their first contribution will be in one year, and they will invest in a portfolio that is split equally between the S&P 500 index and 5-year treasury bonds. This allocation will be maintained by rebalancing the account every 12 months. Assume any tax on earnings will be paid from their income, and not from the education funds. 11. What do the Peytons need to do now to meet their retirement income goal? They do not want to consider Social Security benefits in their retirement planning, 12. Discuss the Peytons' current life insurance situation 13. How much of their current gross income, in dollars and percentages, are the Peytons currently saving toward their retirement goal? 14. What is the weighted beta of Elaine's mutual funds located in her investment portfolio? 15. What are the Peytons' current estate planning deficiencies? o te xwi 11% A