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 1
CASH MANAGEMENT AND SHORT TERM SAVNGS GOALS
To begin identifying Jake’s options in reference to his goals answer the following
questions:
1. Analyze Jake’s cash flow statement.
a. A .Calculate his net worth, asset to debt ratio, investment assets to total
assets ratio, liquidity ratio, and debt service to income ratio.
b. Are these ratios in an acceptable range for him? If not, suggest strategies
to start improving them.
c. Create a new budget for Jake by adjusting some of his expenses that you
feel are either too high or too low. Be specific about how much he should
spend in each category and be sure to justify why you feel this change is
worth making.
2. Help Jake save up for a down payment for a house. He figures he will need to
have $7,350 for a down payment before he can buy a house.
a. Calculate how much Jake must save each month to reach his goal in 12
months, assuming he uses his savings account.
b. Help Jake buy a new Toyota Tacoma for $27,000.
c. Calculate his monthly truck payment if he can get a loan with an interest
rate of 2.5% over 72 months.
d. Calculate his other costs of buying the truck. If he buys the truck his auto
insurance will increase to $135 per month, but his auto maintenance
expenses will fall to approximately $220 per month. Can Jake afford to buy
the truck with his current budget? Explain what he might have to sacrifice
in order to afford the truck.
4. Help Jake build his emergency fund.
a. Determine how much Jack should have in liquid assets in order to have a
comfortable liquidity ratio.
b. Calculate how much he must save each month to fill his emergency fund within
three years.
5.Jake is considering changing to the “extended repayment” plan on his student loans. If
he does this, the loans will take 20 years to pay off instead of 10.
a. Calculate his new monthly payments for all of his student loans if the term
changes to 20-years.
b. How much lower will his total students loan payment be if he changes to the
20-year repayment plan?
c. Is this something Jake should consider doing to help him achieve his other cash
management goals?
6. Using the figures you calculated in #1-5, give Jake a final and comprehensive set of
recommendations for what he should do to balance his budget and reach his goals.
Jake may not be able to accomplish all of his goals, so you will need to either adjust his
goals (like buying a cheaper car/house), get creative with how he spends his money, or
prioritize which goals he should focus on first. Be specific, creative, and as realistic as
possible.
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