Detail five of the concepts that underlie PFP theory.
> What are two pieces of data that are needed in each of the six financial planning areas?
> In calculating the ratio times fixed payments earned, after-tax interest payments are added back in the denominator. Why?
> What is the difference between debt and fixed obligations?
> Jeremy is in financial difficulty. He owes $5,000 and cannot pay it back now. Should he declare bankruptcy? Why? What do you think he should do?
> What are some attractive interviewing techniques?
> What are some of the broad financial goals of people with whom you will come in contact?
> This case allows students to develop solutions themselves. It begins with an extensive background that will assist in the decisions that are asked for in subsequent chapters. BACKGROUND—FIRST INTERVIEW Brad and Barbara arranged to come in to see me. The
> How can financial planning goals be broken down into minimum, satisfactory, and higher-level components according to parts of the financial plan?
> Credit cards are a grossly inefficient way to borrow money. True or false? Explain and discuss their advantages.
> Why is preplanning for an interview important?
> How should resistance to a question or recommended course of action be handled?
> Alexis wants to buy a large home relative to her income and thinks that she may not qualify for a mortgage for 80 percent of the price. She expects interest rates to rise and anticipates staying in the home for many years. Explain the strengths and weakn
> Contrast the views of finance and accounting on recording operating results.
> Outline some expenses of a pro forma statement that cannot use inflation to project their growth and indicate what rate should be used.
> Is an increase in debt a plus or minus from a cash flow standpoint? Explain.
> Why segregate a balance sheet by type of asset and type of liability?
> Elaborate on the two approaches to making projections for a cash flow statement.
> In working out the capital needs analysis, it became apparent that there was need for an additional $17,000 of savings annually over what was previously calculated. The first reason had to do with a recent job development that resulted in a projected mod
> What are reasons that a person may have a poor net cash flow yet be considered to be in good financial health?
> In your opinion, which presents results more fairly, finance or accounting? Explain.
> What makes the household an enterprise?
> Define the term opportunity cost of time.
> What does life cycle theory say a household should have in savings at the end of its life? Is that practical? Explain your answer.
> List some of the advantages and disadvantages of various organizational structures for the individual.
> What is TPM and why is it valuable in the framework of household planning?
> When would it be beneficial for the household enterprise to outsource some activities, for example, cooking?
> Are any of the outlays in preferable to the others? Support your answer.
> What is the importance of the theory of financial planning?
> Richard came in with his cash flow statistics and very helpful notes on projections. His list included He said to assume that his salary will rise 6 percent a year, and his investment income is 11 percent a year (the investment loss came a year ago). H
> Outline the similarities and differences between a household and a business.
> Why is it important to differentiate among the various types of household expenditures?
> Describe household operations according to household finance.
> What is rate of return and why do we use inflation-adjusted return?
> Explain regular annuity versus annuity due and give examples.
> How does household finance tie into financial planning?
> Do you believe Maria needed a financial planner? Why or why not?
> Do you think the amount of information available on the Internet regarding advice for financial planning is beneficial or detrimental to the financial planning career? Support your answer with information from the chapter.
> What is a contributing factor for the increasing demand for financial planners?
> Would a lump sum today or the comparable amount in periodic payments deposited over time provide a higher FV? Why?
> Monica asked that we meet to see if I could help to reduce the differences between them. When the time came, she started the conversation by saying that Richard wasn’t saving any money at all. They hadn’t started implementing. She said he spent a good de
> Why is knowledge of the time value of money useful?
> What is compounding, and why is it important?
> Sam went to a financial planner who proceeded to give him written recommendations in all areas of financial planning. Is that a financial plan? If not, what might be missing?
> List and discuss the parts of a financial plan.
> Explain the difference between sensitivity and scenario analyses.
> List five keys to a successful financial plan.
> Why is a behavioral review so relevant at this point in the planning process?
> Outline the steps in the financial planning process and some questions under each that are significant in completing a financial plan.
> Using Figure 19.1 list the source and uses of cash for the household. Figure 19.1: Revenues Living costs (including taxes) Special circumstances planning Educational Debt planning PFP Integration Capital expenditures (household investments) Estate
> Richard and Monica maintained their contrasting views when it came to estate planning. Even though their assets were well under the threshold for exposure to federal estate tax, he wanted to set up a bypass trust. Monica wanted the personal assets, now m
> Chris’s current liabilities exceeded his current assets. He said not to worry; he could use his credit card if he needed extra funds. What do you think of this practice?
> List five reasons for saving.
> Name one behavioral characteristic in each part of active financial planning other than investments. Indicate how they can affect the financial planning process.
> Name three behavioral weaknesses that might apply to investment analysis and give examples of them.
> Provide five methods for helping people to save.
> What is cash flow planning?
> Discuss behavioral life cycle theory. Do you believe it is realistic?
> Indicate what a heuristic is and give four examples of it.
> Should goal planning be part of the financial planning process or should there just be a numbers-only approach?
> Indicate the mechanisms for enhancing savings practices. Are they realistic? Discuss.
> Richard and Monica estimated they would have adjusted gross income of $108,000 in the current year and would have exemptions of $7,900 and deductions of $25,000. Their average combined federal and state tax bracket was 33 percent. Required: 1. Compute t
> What is a liquidity substitute? When should it be used?
> Why do people construct a budget?
> What is happiness research? Does this research indicate that money brings happiness?
> Discuss the planning steps in a simple capital needs analysis.
> Should a comedian and a government employee receive the same financial asset allocation if they have similar tolerances for risk? Why?
> Why is overhead cost considered a liability under TPM?
> What is total portfolio management?
> Identify the advantages of Monte Carlo simulation.
> Contrast simple and risk-adjusted capital needs analysis.
> Why can it be beneficial to raise or lower the withdrawal rate in response to market fluctuations?
> Brad and Barbara also attended the meeting. They said they were too young to start saving for retirement. Retirement seemed “hundreds of years” away and they wanted to have fun today. They would have plenty of time to save for retirement when they were i
> What are the advantages of the withdrawal rate method?
> What are the weaknesses of the withdrawal rate method?
> List the steps in the retirement needs analysis.
> When should the investment rate, the blended rate, and the inflation rate be used, respectively?
> How do an open-end and a closed-end mutual fund differ?
> Distinguish between a dividend discount model and a price-earnings model.
> Compare preferred shares with common shares and with debt.
> Distinguish between a bond’s coupon yield and a current yield.
> List and give examples of the three types of bond risks.
> List and explain four key steps in selecting a mutual fund.
> At the retirement planning meeting held recently, Richard and Monica were in agreement that they were well short of the money they needed for retirement at Richard’s age 65. Monica said she was thinking of handling investments herself. Richard said he wa
> What are the Sharpe ratio and the alpha coefficient used for? Contrast them.
> What is an exchange-traded fund?
> Explain the separate characteristics of three prominent types of load funds.
> List the maturity dates for classification purposes for bonds.
> Sally gave $200,000 to her daughter and said, “It’s yours as long as you agree to support me when I am older, if I should run out of my funds.” Is that a gift? Explain.
> Why are basis and a step-up in basis important?
> Shelly had just inherited money from her parents that she was considering placing in a joint account with her husband. She also was contemplating a legal separation from her husband. What advice would you give her? Why?
> Identify the alternative ways of titling and transferring assets and indicate how they differ.
> Detail the advantages and disadvantages of probate.
> Name the three major ways of receiving non–work-related funds from acquaintances and indicate how they should be valued.
> When I examined Richard and Monica’s insurance policies, I found the following: a. Medical coverage was adequate. b. Auto insurance was at the minimum level for the state of $50,000 to $100,000 per accident. c. Homeowners insurance was at a level of 50 p
> What are the strengths and weaknesses of a durable power of attorney?
> Morris didn’t understand why he should set up a bypass trust. He said that without a trust, upon his death the $6,000,000 in assets in his name could go to his wife free of estate tax. Why should he put restrictions on his wife by transferring the money
> Shane didn’t want to establish a bypass trust with her son as remainder beneficiary even though it would reduce the tax on her estate. She said her husband might need some of the money. Is that wise? Explain.
> Detail the advantages and disadvantages of setting up a trust.
> Samantha was affluent and gave $6,000 to each of 1,000 needy individuals. Someone told her that under the uniform estate and gift tax, she would have to pay a tax. Were they correct?
> Identify five reasons for having a will.
