The Johnsons Change Their Life Insurance Coverage Harry and Belinda Johnson spend $20 per month on life insurance in the form of a premium on a $10,000, paid-at-65 cash-value policy on Harry that his parents bought for him years ago. Belinda has a group term i-surance policy from her employer with a face amount of $200,000. By choosing a group life insurance plan from his menu of employee benefits, Harry now has $100,000 of group term life insurance. Harry and Belinda have decided that, because they have no children, they could reduce their life insurance needs by protecting one another's income for only four years, assuming the survivor would be able to fend for himself or herself after that time. They also realize that their savings fund is so low that it would have no bearing on their life insurance needs. Harry and Belinda are basing their calculations on a projected 4 percent rate of return after taxes and inflation. They also estimate the following expenses: $15,000 for final expenses, $20,000 for readjustment expenses,

and $5,000 for repayment of short-term debts.

Requirement:

(a) Should the $3,000 interest earnings from Harry's trust fund be included in his annual income for the purposes of calculating the likely dollar loss if he were to die? (See the discussions about the Johnsons in Chapter 1 beginning on page 34.) Explain your response.

(b) Based on your response to the previous question, how much more life insurance does Harry need? Use the Run the Numbers worksheet on page 366 to arrive at your answer.

(c) Repeat the calculations to arrive at the additional life insurance needed on Belinda's life.

(d) How might the Johnsons most economically meet any additional life insurance needs you have determined they may have?

e) In addition to their life insurance planning, how might the Johnsons begin to prepare for their retirement years?

.. Endowment income is a critical part of the annual budgets at colleges and universitie3_ A study by the National Association of College and University Business Officers reported that the 435 colleges and universities surveyed held a total of $413 billion in endowments. The 10 wealthiest universities are shown below (The Wail Street Journal, January 27, 2009). Amounts are in billion of dollars. University Endowment ($billion) University Endowment ($hillion) Columbia 7.2 Princeton 164 Harvard 36.6 Stanford 17.2 M.I.T. 10.1 Texas 16.1 Michigan 7.6 Texas A&M 6.? Northwestern _ 7.2 Yale 22.9 a. What is the mean endowment for these universities? b. What is the median endowment? c. What is the mode endowment? - d. Compute the rst and third quartiles. e. What is the total endowment at these 10 unit ersities'? These universities represent 2. 3% of the 435 colleges and universities surveyed. What percentage of the total $413 billion 1n endowments is held by these 10 universities? The Wall Street Journal reported that over a recent ve-month period, a downturn in the economy has caused endowments to decline 23%. What is the estimate of the dollar amount of the decline in the total endowments held by these 10 universities? Given this situation, what are some of the steps you would expect university admin- istrators to be considering? Moira's Fruit Wine is planning to expand the amount of wine bottle inventory they are holding, and are evaluating two plans to finance the additional inventory. The required additional financing for the inventory is $100,000. Plan A would finance 80% of the inventory using long term financing, and the other 20% using short term financing. Plan B would finance $35,000 of the inventory using long term financing, and the remainder using short term financing. Annual interest rates are currently 5% for short term financing, and 8% for long term financing. Compute the interest expense cost of both plans. Provide a brief comment on which plan is more aggressive. (6 marks)Equity and debt financing both have their advantages and disadvantages. Which of the following pair of phrases below accurately reflect the Advantages of batt types of financing Debt Financing Equity Financing Changes stockholder control Dividends are optional Debt Financing Equity Financing Does not have to be repaid Does not change stockholder control Debt Financing Equity Financing Interest is tax deductible Does not have to be repaid Debt Financing Equity Financing Dividends are optional Interest is tax deductible