Business Question

Fin 210 – Case Study Instructions and RubricEach portion of the case study that you submit will be submitted in PowerPoint format.
This PowerPoint should be created as if you are addressing your client (Jake). You will
need to show Jake that you have crunched all the relevant numbers and answered all of
his questions (as outlined in the assignment). You must then provide Jake with a
comprehensive plan of action. Think about answering the following question. “Based on
the numbers and the opportunities I have explored, I suggest that you ”.
Each case study assignment will build on the work from the previous assignments. So,
for example, you will need to use the information and figures you estimated from
assignment #1 to provide an updated, comprehensive set of recommendations in
assignment #2.
You will receive feedback about any errors in calculations that you make so that you
may adjust them. This will be important because errors in calculations in one
assignment may lead to bad recommendations in a future assignment. If your team
submitted a group presentation, make sure that each member of the team receives a
copy of the feedback from the assignment.
The case study will be graded on the following criteria:
1. Completeness. Every question in the assignment must be answered. Points will
be deducted for every question not answered. Here’s a hint: If you see a question
mark in the assignment, there had better be an answer in your presentation.
2. Quality of presentation. The presentation needs to be readable and
understandable for the client. Graphics and charts are always useful for
expressing financial situations and problems, but are not required. Technical
terms used in the presentation should be defined, and complex ideas may need
to be explained so that your financially unsophisticated client may understand.
3. Quality of recommendations. You will not be graded on whether or not your
recommendations are “good”, per se, but more on the level of thoughtfulness
demonstrated by your recommendations. Perfunctory answers will lose points.
CASE STUDY ASSIGNMENT 2
HOUSING AND DEBT
One of Jake’s short-term goals is to buy a larger house for his family. He has shopped around
for home mortgages and narrowed his choices to the following:
30-year Fixed-Rate FHA Mortgage
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6.00% interest
3.5% down payment
Jake expects to have to pay the following expenses in addition to his mortgage to own and
maintain the house.
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●
●
●
●
PMI of 0.8% of the original loan balance each year
Property taxes of 1.31% of the value of the house each year
Homeowner’s insurance of 1% of the value of the house each year
Maintenance of 0.5% of the value of the house each year
Utility expenses (gas, electricity, and water) the same as his apartment
Using this information, answer the following questions:
1. Jake claims that he can buy a $276,000 for about the same as his rent, and therefore he
should definitely buy because he has heard that “renting is bad”. Help him walk through
this argument.
a. Calculate Jake’s monthly mortgage payment for a $276,000 house.
b. Compare this payment to his current rent.
c. Calculate the other expenses of home ownership each month, as outlined above
(taxes, insurance,maintenance, and PMI).
d. Discuss with Jake the total amount that he must spend each month to buy a
$276,000 house.
e. How does the total monthly cost of the home compare to the rent on his current
apartment?
f. Is Jake’s argument that he should buy because it costs the same as rent correct?
2. Jake wants to know what kind of house he could reasonably afford to buy.
a. Calculate the maximum price of a house that you feel is reasonable for Jake to
buy based on the budget you created for him. (Note: the affordability calculation
requires you to know the “other expenses” up front. Use the following estimates
for his other expenses for the purposes of this calculation: PMI = $100 per
month, Taxes = $250 per month, Insurance = $175 per month, maintenance =
$75 per month)
b. Go to www.zillow.com and find a home/condo in the Charlotte area that Jake can
afford, up to, but not exceeding, the price you calculated in #2a.
c. Present this house to Jake as an example of what kind of home he can afford
within the next year. (Note: Try to avoid properties listed for auction for this
assignment. The final price is unknown, since it depends on the actual bidding.)
d. How much would he need to save each month to accumulate enough for a 3.5%
down payment on this house in 12 months?
e. What would his monthly mortgage payment and other home ownership costs for
the house you selected be?
3. You are still considering whether or not he should extend the repayment on his student
loans.
a. Calculate the total cost of all of his student loans if he sticks with the 10-year
repayment.
b. Calculate the total cost of all of his student loans if he changes to the 20-year
repayment.
c. Subtract these two numbers to get the total cost of switching.
4. Incorporate his goals and resources available from the first assignment here and provide
Jake a complete set of updated recommendations.
a. What should Jake do about housing? Buy the expensive house? Buy the cheap
house? Keep renting? Some other strategy of your own? Feel free to get creative
but try to be realistic as well!
b. How does his housing decision affect the remainder of Jake’s cash management
goals? Think in terms of trade-offs: what must he give up in order to implement
your recommendations here?
c. Make a recommendation about whether or not he should extend the payment on
his student loans.
CASE STUDY
Jake Johnson – Client Information
Jake Johnson is a young single professional living in Charlotte, North Carolina. At age
24, he has been working for six months at his new job as a junior electrical engineer at
a local utilities company. Jake loves living in the Carolinas and plans to remain in or
near Charlotte until retirement. Jake has also been dating Amanda for the past three
years, and they are beginning to talk about marriage, but want to wait a couple more
years until Amanda is out of school. Jake’s parents, now in their mid-sixties, want to
retire but are financially unable to. At his parent’s urging, Jake has decided to prepare a
financial plan to prevent himself from facing the same financial difficulties.
Jake and Amanda have not really discussed their finances, but Jake is sometimes
irritated by the way Amanda “pinches pennies.” Amanda will not buy anything unless it
is marked down, and she always shops for the best prices. Jake likes to spend money
and is currently thinking about upgrading his vehicle to a new Toyota Tacoma. He also
gets pleasure from buying gifts for those he loves. Jake was a triathlete in college and
would like to continue to compete. In order to remain competitive, he must continue to
train at a high level and travel to compete it at least three triathlons each year.
Jake was responsible for paying for his own education, and despite having a small
scholarship, has significant student loan debt. He must start repaying these loans now
that he has graduated, and he is surprised by the size of his payments. In addition to his
student loan debt, he also has some credit card debt that he would like to pay off.
Jake has several goals. He would like to reduce his debt and establish an adequate
emergency fund to be better financially prepared. Jake feels that the rent for his
two-bedroom apartment is too expensive. He is considering buying a house instead.
Jake does not currently save for retirement, and he does not know much about
investments. With his new job, he will have the opportunity to participate in a 401(k)
retirement plan. He is uncertain, given his other goals, about how much he should
currently be saving into the plan. He also needs to select health insurance benefits from
the package offered by his new employer.
Motivated by the desire to be financially successful, Jake has decided to consult you to
help him develop a financial plan. He has filled out the data gathering forms you
provided to him and returned them for your use. These forms are presented on the
following pages. Read the
information Jake has provided so that you can “get acquainted” with his financial
situation
INSURANCE INFORMATION
AUTO INSURANCE
Jake’s parents covered the cost of his auto-insurance while he was in college. Now that
he has graduated, he is responsible for paying the $65 per month policy premium.
However, if he
decides to purchase a new truck, he will have to get higher coverage that will cost $135
per
month.
RENTER’S INSURANCE
Jake does not currently have renter’s insurance. If it is decided that this is something he
needs, it will cost him $15 per month.
LIFE INSURANCE
Jake currently has no life insurance. If he buys some, he will have to pay $10 per month
for
every $100,000 of coverage he purchases.
DISABILITY INSURANCE
Jake’s new employer provides short-term disability insurance as a benefit of
employment.
MEDICAL INSURANCE
Jake was previously covered by his parent’s health insurance policy. He can remain on
his
parent’s policy until he is 25, but he would like to get his own policy as soon as possible
so his
parents don’t have to keep paying for him. His employer has provided the following
insurance
policy options:
First Care
Blue Cross
Premium – One Person
$125
$280
Premium – Two Person
$300
$495
Premium – Family
$450
$750
Calendar year deductible
$1,000
$0
Out-of-pocket coinsurance
maximum
$15,000
$12,000
Co-Insurance rate
20%
10%
ESTATE PLANNING INFORMATION
Jake currently has no estate planning documents in place.
FINANCIAL GOALS
Establish a cash management plan
Incorporate a comparison of debt payoff vs savings decisions.
Debt payoff includes student loans and credit cards.
Savings includes emergency (min. $5,000 preferred), honeymoon, gifts, and retirement.
Obtain adequate insurance.
Consider life, medical, disability, and property coverage.
Make a decision about major life purchases.
When and how to buy a house and new truck
Make sure necessary estate planning documents are in place.
Consider medical directives, powers of attorney, and a will.
What is your single most important financial objective at this time?
To make sure I am saving in a way that will allow me to meet my short and intermediate
term
goals.
FINANCIAL PRIORITIES
Jake
a. LIVING: paying monthly bills
(1)
b. PLEASURE: spending money
(3)
c. SAVING: invest in future
(2)
d. DISABILITY: protect against
(5)
e. DEATH: care for family
(8)
f. REDUCE TAXES: spend to save (6)
g. INVESTING: accumulating assets (4)
h. CHILDREN: starting a family
(7)
* Prioritized with 1 being most important and 8 being least important.
OTHER INFORMATION
1. Are you able to save regularly? I do not currently save but believe I will be able to
save from my earnings at my new job. I just need a little more time.
2. How much do you save annually? N/A
3. Do you invest regularly? I currently have no investment experience but am
interested in investing for retirement.
4. Do you feel you are financially organized? Not really.
5. Do you budget your money? No, and I have been forced to use my credit cards
as a result of overspending.
6. If you were to die, could your spouse handle the finances? I’m not married yet,
but I believe Amanda could handle the finances if we do get married.
7. How do you feel about saving for retirement? It is important.
8. If you had an extra $5,000 what would you do with it? Save it for a down payment
on a house.
9. How do you feel about taking investment risks? Moderate risk-taker
10. How is your health? Very good.
INCOME AND EXPENSES
Projected for the coming year, based on expenses since graduation
INCOME
Gross Monthly Income
Jake’s Salary
$5,500
Cash Gifts
Intrest
$3
Total Income
$5,503
Expenses
Monthly Expenses
Fixed Expenses
Rent
$1,400
Utilities
$120
Federal Income Tax withholding
$680
Social Security Tax (FICA) withholding
$410
Cell Phone
$40
Cable TV and Internet
$120
Groceries
$180
Auto Maintenance (gas, repairs, etc.)
$250
Auto Insurence
$65
Health Insurence Premiums
Credit Card Fees
$16
Visa Minimum Payment
$144
Sport’s Authority Minimum Payment
$0
American Express Minimum Payment
$36
Student Loan Payment
$447
Total Fixed Expenses
$3,908
Variable Expenses
Medical/dental expenses
$25
Food away from home
$200
Clothing
$60
Personal Care
$60
Entertainment
$100
Travel for Tranthalons
$350
Gym Membership (with CC discount)
$45
Fitness Trainer
$120
Total Variable Expenses
$960
Total Expenses
$4,868