QUESTION 1: After 10 years of marriage, Ashley and Charles have decided to separate. Charles will take the custody of the children and will stay home for the next 8 years. Since Charles will have no income, Ashley will pay him to help support him and the children until he returns to work after 8 years. The problem at hand is to determine whether a lump sum or a periodic annuity is better for both of them. Assume that periodic payments are taxable for the recipient and tax deductible for the payer, while lump sum payments are not taxable for the recipient and not tax deductible for the payer. Assume that the lump sum will be paid one year from today and if the payment is periodic then the first annual payment will be today. Charles has a marginal tax rate of 21% while Ashley has a marginal tax rate of 46%. Suppose they can earn a before tax nominal rate of return of 6% per year. a. What are their after taxes rates of return? b. Ashley offers a lump sum of $150,000. What before tax annual payment stream for 8 years is equivalent to the lump sum from her point of view? c. Charles asks for a lump sum of $170,000. What before tax annual payment stream for 8 years is equivalent to the lump sum for him? d. Based on your answer to b) and c) is there a way that they both could be better off. If yes, then what should be the amount of payment or payments? e. Suppose they both agreed on a before tax annual payment of $35,000 today. Payments will decline at 3% per year in real terms. In total there will be 8 payments. If the inflation rate is 2% then what is expected present value of after tax payments from Ashley? and after tax receipt to Charles?

QUESTION 2: Emily and Harry Wong are considering buying a house in Scarborough. Their combined gross income is $200,000. They have no savings. They just bought a car. To finance the car purchase they took a 5 year $40,000 loan at an interest rate of 6% compounded monthly. They have a furniture loan which requires a monthly payment of $900 for the next three years. Their goal is to buy a house in 3 years financed with a conventional mortgage (20% down payment). Currently property taxes are $800 per month on the type of house they are interested in. The legal, moving, and other costs are expected to be $7,000 in today?s dollars. The inflation rate is 2% per annum, and they expect their salaries to rise at a real rate of 3% per annum. House prices, property taxes, legal, moving, and other costs will increase at the inflation rate. Use the GDS ratio of 28% and TDS ratio of 38% to solve the problem in nominal terms. a. What is the maximum they can afford to pay for a house and still qualify for the conventional mortgage? Assume 25 year amortization, monthly payments, and mortgage loan interest rate of 3% compounded semiannually. b. Suppose currently they have $100,000 in savings. How much do they need to save during each of the next 3 years to make the down payment? Assume they can earn a nominal before tax rate of return of 6% on their savings and their marginal tax rate is 40%.

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QUESTION 3: Sandra and Sandford have a 3 year old daughter and are expecting their 2nd child. They both are 30 years old. They own a house which worth $500,000. Their monthly payment on mortgage loan is $2100. Interest rate is 0.25% per month. It will take them 15 years to pay off the loan. Sandra is a chemist with a pharmaceutical firm, earning $60,000 a year, and after all deductions she takes home $1,750 every two weeks. Sandford is a plumber with TDSB earning $80,000 per year, and after all deductions he takes home $2,300 every two weeks. They would like to buy a bigger house. The house they like will cost around $800,000. They came to you for advice and have provided you with the following additional information. Cash on hand $ 1,000 Chequing account 4,000 Canada Savings Bond 30,000 Home 500,000 Sandra?s car 35,000 Sandford?s car 5,000 Bills outstanding: Master Card 1,500 AMEX 1,000 Estimated monthly expenditures: Mortgage loan payment 2,100 Car loan payment 600 Furniture loan 400 Groceries 1,000 Gas and maintenance for the cars 1,200 Day care 700 Utilities 400 Property taxes 450 Insurance (cars) 300 Insurance (house) 80 Repair and maintenance expenses for the house 250 Newspaper and magazines 40 Entertainment 300 Clothes 300 Miscellaneous 100 Personal Assets 50,000 Sandra?s RRSP in metals and minerals mutual fund 30,000 Sandford?s RRSP in East European Equity mutual fund 40,000 Cash Surrender Value of Life Insurance policies 17,000

Two years ago the family bought some furniture. They have a furniture loan at an interest rate of 0.6% per month. It requires monthly payment of $400, and will be paid off in 15 months. Sandra still has to pay $600 per month for 30 months to pay off her car loan. She pays 0.5% per month interest on the car loan.

The family usually takes one vacation a year at a cost of $5,000 per year.

a. Using the information provided, prepare a balance sheet and income statement for the family for the last year. Assume they had no taxes owing or refunded. b. Discuss and comment on their financial situation, and make recommendation. Assume in real terms there will be no change in their income and expenses.

-4- QUESTION 4: Mr and Mrs Maxer are considering purchasing a $600,000 two bedroom condominium and living in it for 5 years. They have saved $200,000, which can be used for down payment and for closing costs. They will take out a mortgage loan to be amortized over 15 years. Interest rate on mortgage loan will be 3% per annum for the first 2 years and after that it will be 5% per year. Interest rate is compounded semiannually. Apart from monthly mortgage payments other homeownership costs are estimated as follows: Closing costs (legal, moving, land transfer tax, etc.) $20,000 Property Taxes $6,000/year Insurance Premium $700/year Condominium maintenance fee $8,000/year

Alternatively, they can rent the condominium for $1,900/month. Monthly rent of $1,900 includes property taxes. They can invest their savings to earn an after tax rate of return of 4% p.a. It is expected that rent, property taxes, insurance premium, and condominium maintenance fees, will increase at 2% p.a. Real estate prices will continue to rise in the foreseeable future at an average rate of 2% or 5% per year. Probability that price will rise at 5% per year is 3 times as much as the probability that price will rise at 2% per year. Should they buy or rent?

QUESTION 5: Amanda Liu who is 50 years old would like to retire at age 60. She is currently earning $160,000 per year in today?s $s and would like to have 60% of that income per year during retirement. She expects to live till age 90. She is eligible to receive maximum CPP and OAS starting at age 65 in today?s $s. Use 2012 values from table 17.4. She will receive an employer pension of $50,000 per year in nominal $s after she retires at age 60. She would like CPP to start after she turns 60, and OAS to start after she turns 65. For each month earlier than age 65 CPP starts she will lose 0.6%. Her marginal tax rate is 46%. She has $290,000 in RRSP now. She plans to deposit $6,000 per year in nominal $s into it each year until retirement. She will deposit tax refund on the RRSP contribution into a Tax Free Savings Account (TFSA). She expects to earn a real rate of return of 3% per year on her portfolio. Inflation rate is expected to be 2% per year. Assume deposits into the RRSP and TFSA are in nominal $s and are made at the beginning of the year. Savings in TFSA provide no income tax deduction, but the principal and income in TFSA are never taxed, even when withdrawn. Therefore, to make the TFSA comparable with other before tax values in this problem, multiply the accumulated TFSA value by 1.25 a. Do Amanda?s savings provide enough to maintain the standard of living she desires if she lives to age 90? If not, how much will be the value of the shortfall in retirement savings at age 60. b. How much more she contributes to her TFSA each year to reach her goal. Remember for each year maximum contribution allowed is $5,500.

MGFC20H3 (Personal Financial Management) Assignment 2 Professor: Due Date: November 29, 2016 By 3pm Syed Ahmed STUDENT'S NAME: ________________________________________________________________ Last First Middle STUDENT'S I.D. NO.:_______________________________________________________________ QUESTION NO. MAX. MARKS MARK OBTAINED 1 20 __________________ 2 20 __________________ 3 20 __________________ 4 20 __________________ 5 20 __________________ 100 __________________ TOTAL MARKS BONUS QUESTION 2 additional mark in the course grade GOOD LUCK The University of Toronto's Code of Behaviour on Academic Matters applies to all University of Toronto Scarborough students. The Code prohibits all forms of academic dishonesty including, but not limited to, cheating, plagiarism, and the use of unauthorized aids. Students violating the Code may be subject to penalties up to and including suspension or expulsion from the University. Management, 1265 Military Trail, Toronto, ON, M1C 1A4, Canada www.utsc.utoronto.ca/mgmt -2QUESTION 1: After 10 years of marriage, Ashley and Charles have decided to separate. Charles will take the custody of the children and will stay home for the next 8 years. Since Charles will have no income, Ashley will pay him to help support him and the children until he returns to work after 8 years. The problem at hand is to determine whether a lump sum or a periodic annuity is better for both of them. Assume that periodic payments are taxable for the recipient and tax deductible for the payer, while lump sum payments are not taxable for the recipient and not tax deductible for the payer. Assume that the lump sum will be paid one year from today and if the payment is periodic then the first annual payment will be today. Charles has a marginal tax rate of 21% while Ashley has a marginal tax rate of 46%. Suppose they can earn a before tax nominal rate of return of 6% per year. a. What are their after taxes rates of return? b. Ashley offers a lump sum of $150,000. What before tax annual payment stream for 8 years is equivalent to the lump sum from her point of view? c. Charles asks for a lump sum of $170,000. What before tax annual payment stream for 8 years is equivalent to the lump sum for him? d. Based on your answer to b) and c) is there a way that they both could be better off. If yes, then what should be the amount of payment or payments? e. Suppose they both agreed on a before tax annual payment of $35,000 today. Payments will decline at 3% per year in real terms. In total there will be 8 payments. If the inflation rate is 2% then what is expected present value of after tax payments from Ashley? and after tax receipt to Charles? QUESTION 2: Emily and Harry Wong are considering buying a house in Scarborough. Their combined gross income is $200,000. They have no savings. They just bought a car. To finance the car purchase they took a 5 year $40,000 loan at an interest rate of 6% compounded monthly. They have a furniture loan which requires a monthly payment of $900 for the next three years. Their goal is to buy a house in 3 years financed with a conventional mortgage (20% down payment). Currently property taxes are $800 per month on the type of house they are interested in. The legal, moving, and other costs are expected to be $7,000 in today's dollars. The inflation rate is 2% per annum, and they expect their salaries to rise at a real rate of 3% per annum. House prices, property taxes, legal, moving, and other costs will increase at the inflation rate. Use the GDS ratio of 28% and TDS ratio of 38% to solve the problem in nominal terms. a. What is the maximum they can afford to pay for a house and still qualify for the conventional mortgage? Assume 25 year amortization, monthly payments, and mortgage loan interest rate of 3% compounded semiannually. b. Suppose currently they have $100,000 in savings. How much do they need to save during each of the next 3 years to make the down payment? Assume they can earn a nominal before tax rate of return of 6% on their savings and their marginal tax rate is 40%. -3QUESTION 3: Sandra and Sandford have a 3 year old daughter and are expecting their 2nd child. They both are 30 years old. They own a house which worth $500,000. Their monthly payment on mortgage loan is $2100. Interest rate is 0.25% per month. It will take them 15 years to pay off the loan. Sandra is a chemist with a pharmaceutical firm, earning $60,000 a year, and after all deductions she takes home $1,750 every two weeks. Sandford is a plumber with TDSB earning $80,000 per year, and after all deductions he takes home $2,300 every two weeks. They would like to buy a bigger house. The house they like will cost around $800,000. They came to you for advice and have provided you with the following additional information. Cash on hand $ 1,000 Chequing account 4,000 Canada Savings Bond 30,000 Home 500,000 Sandra's car 35,000 Sandford's car 5,000 Bills outstanding: Master Card 1,500 AMEX 1,000 Estimated monthly expenditures: Mortgage loan payment 2,100 Car loan payment 600 Furniture loan 400 Groceries 1,000 Gas and maintenance for the cars 1,200 Day care 700 Utilities 400 Property taxes 450 Insurance (cars) 300 Insurance (house) 80 Repair and maintenance expenses for the house 250 Newspaper and magazines 40 Entertainment 300 Clothes 300 Miscellaneous 100 Personal Assets 50,000 Sandra's RRSP in metals and minerals mutual fund 30,000 Sandford's RRSP in East European Equity mutual fund 40,000 Cash Surrender Value of Life Insurance policies 17,000 Two years ago the family bought some furniture. They have a furniture loan at an interest rate of 0.6% per month. It requires monthly payment of $400, and will be paid off in 15 months. Sandra still has to pay $600 per month for 30 months to pay off her car loan. She pays 0.5% per month interest on the car loan. The family usually takes one vacation a year at a cost of $5,000 per year. a. Using the information provided, prepare a balance sheet and income statement for the family for the last year. Assume they had no taxes owing or refunded. b. Discuss and comment on their financial situation, and make recommendation. Assume in real terms there will be no change in their income and expenses. -4QUESTION 4: Mr and Mrs Maxer are considering purchasing a $600,000 two bedroom condominium and living in it for 5 years. They have saved $200,000, which can be used for down payment and for closing costs. They will take out a mortgage loan to be amortized over 15 years. Interest rate on mortgage loan will be 3% per annum for the first 2 years and after that it will be 5% per year. Interest rate is compounded semiannually. Apart from monthly mortgage payments other homeownership costs are estimated as follows: Closing costs (legal, moving, land transfer tax, etc.) $20,000 Property Taxes $6,000/year Insurance Premium $700/year Condominium maintenance fee $8,000/year Alternatively, they can rent the condominium for $1,900/month. Monthly rent of $1,900 includes property taxes. They can invest their savings to earn an after tax rate of return of 4% p.a. It is expected that rent, property taxes, insurance premium, and condominium maintenance fees, will increase at 2% p.a. Real estate prices will continue to rise in the foreseeable future at an average rate of 2% or 5% per year. Probability that price will rise at 5% per year is 3 times as much as the probability that price will rise at 2% per year. Should they buy or rent? QUESTION 5: Amanda Liu who is 50 years old would like to retire at age 60. She is currently earning $160,000 per year in today's $s and would like to have 60% of that income per year during retirement. She expects to live till age 90. She is eligible to receive maximum CPP and OAS starting at age 65 in today's $s. Use 2012 values from table 17.4. She will receive an employer pension of $50,000 per year in nominal $s after she retires at age 60. She would like CPP to start after she turns 60, and OAS to start after she turns 65. For each month earlier than age 65 CPP starts she will lose 0.6%. Her marginal tax rate is 46%. She has $290,000 in RRSP now. She plans to deposit $6,000 per year in nominal $s into it each year until retirement. She will deposit tax refund on the RRSP contribution into a Tax Free Savings Account (TFSA). She expects to earn a real rate of return of 3% per year on her portfolio. Inflation rate is expected to be 2% per year. Assume deposits into the RRSP and TFSA are in nominal $s and are made at the beginning of the year. Savings in TFSA provide no income tax deduction, but the principal and income in TFSA are never taxed, even when withdrawn. Therefore, to make the TFSA comparable with other before tax values in this problem, multiply the accumulated TFSA value by 1.25 a. Do Amanda's savings provide enough to maintain the standard of living she desires if she lives to age 90? If not, how much will be the value of the shortfall in retirement savings at age 60. b. How much more she contributes to her TFSA each year to reach her goal. Remember for each year maximum contribution allowed is $5,500. BONUS QUESTION Imagine you are the professor of this course. Provide ONE question that you would like to include in the final exam of MGFC20 with the solution. If the question will be adopted in exams or assignments in future years, you will receive 2 additional points in the COURSE grade. Note the adopted questions will NOT be used in this year's final exam. Also, please be reminded that it would be a waste of time if you use any previous exam or assignment questions here. You have to come up with NEW and INNOVATIVE