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. They were both young college graduates and arrived wearing jeans and T-shirts. I soon found out they were recently married and lived with Brad’s parents, Richard and Monica, in the basement of their house. Brad and Barbara paid for all of their own expenses. His parents got along extremely well with Barbara and treated her as one of their children. Recently the relationship between them had been deteriorating. When they weren’t arguing, they were whispering to each other. Both Brad and Barbara had overheard some of their conversations, which seemed to be about money and investing. Brad was very close to his uncle Tim and asked his advice about the situation. He suggested that Brad and Barbara recommend that their parents see a financial planner. Tim thought Brad and Barbara should meet the planner prior to discussing their recommendation with their parents. He had one advisor in mind. Tim said that Brad’s parents were both educated and unusually open in their discussions. Brad and Barbara should relay to the parents their concerns, including the fact that the parents’ problems were beginning to affect their own lives. Tim said that Brad and Barbara should suggest handling the financial concerns as a family problem that could be worked out together, one that could bring the four of them closer. He was sure they would respond favorably. In fact the uncle was correct. My meeting with Brad and Barbara was very constructive, and I gained insight into the parents. Thereafter, Richard, the father, called and made an appointment. Interestingly, he mentioned that Brad and Barbara had some financial issues themselves. The detailed planning was to be done for the parents, but the engagement also would cover any planning that Brad and Barbara wanted done. Richard walked tentatively into my office early one evening. He glanced around nervously and closed the door behind him. I could sense that there was no need for small talk. He wanted to tell me his story. Richard, age 58, told me he had grown up in a small town and had married the high-school prom queen. He described Monica as a sweet and caring wife, as beautiful at 54 as she was at 18. He indicated that she would be devastated by his news. He became choked up, and we paused for a minute. The news was that he had lost $200,000 in a speculative investment. He mentioned that his $550,000 in retirement assets was down to a current figure of $350,000. He asked me to help them without telling his wife of the loss. I told him that if I took an assignment that involved two people, there would have to be honesty all around. He mentioned again that he thought she would be devastated. My response was that even if we hid it, the true story would come out eventually anyway. I thought that he and Monica should come in next and we would start the process. At our next meeting, Richard came in first, and we waited for Monica. She entered the room, a tall, elegant woman with a ready smile. We engaged in some small talk, and after a time, I stated that Richard had something to say. When he broke the news, she was not as frail and sensitive as Richard had feared. She was visibly shaken but said their recent arguments over money had made her suspicious. She then asked how we could “make it up.” I indicated I would help but first wanted some particulars……………………………………………….. Required: 1. What do you think of Brad and Barbara’s seeking help for Brad’s parents? 2. What prompted Richard to seek assistance? Was it only because of Brad and Barbara? 3. What type of financial plan seems appropriate for Richard and Monica? 4. Why do you think Monica didn’t react more negatively to the financial news? 5. What might the loss tell you about Richard? 6. Do you think I should have met privately with Richard? Why? 7. Complete the introductory section of the financial plan.
> Why should a family have umbrella insurance?
> Identify and briefly explain the principal types of social insurance.
> Why is an own occupation definition for disability so valuable?
> Contrast an HMO and a PPO.
> Laurence was presented with a capital expenditure for a furnace that would cost $12,000 today and would generate the following savings. Year ………………..Amount 1 ……………………………$2,000 2 ……………………………$3,000 3 …………………………….$2,000 4 ……………………………$4,000 5 ……………………………$5,
> Define adverse selection and give an example of it.
> What is longevity risk and explain the two different scenarios that exist?
> Identify the three parts of an insurance policy?
> What is indexed universal life insurance and how is it different from the other whole life policies?
> How does portfolio management enter into the risk management process?
> Name three strengths and weaknesses of whole life and term insurance.
> Julian was considering whole life and term insurance for his 20-year need. Which one should he select?
> Why can term insurance be deducted from whole life to determine the return on the whole life policy?
> Describe the insurance needs approach.
> List the types of risks to human assets and briefly explain how to reduce them.
> Louis had the following cash flow items: Cash flow from operations ………………………$40,000 Interest payments ………………………………………6,000 Total interest and debt payments …………………9,000 If Louis is in the 30 percent tax bracket, how many times are fixed payments earned
> What are the significant factors in selecting an insurance company?
> How can insurance modify portfolio risk?
> What are the weaknesses of mutual funds?
> In what cause would you to suggest direct ownership over private partnership? Why?
> Compare and contrast the value in owning a home versus investing in real estate investment trusts (REITs).
> Why is a home a good inflation hedge? Should a home be included as an asset if its occupants aren’t sure they could sell it? Explain.
> Why is the home often a better investment than renting? Under what circumstances would renting be preferred?
> What are the significant characteristics of a mortgage?
> Contrast life cycle human-asset valuations for skilled and unskilled workers.
> What are the strengths and weaknesses of the net present value (NPV) and internal rate of return (IRR) methods?
> Smith invests in a limited partnership that requires an outlay of $9,200 today. At the end of years 1 through 5, he will receive the after-tax cash flows shown below. The partnership will be liquidated at the end of the fifth year. Smith is in the 28 per
> Why should capital expenditures be treated separately on a cash flow statement?
> Briefly explain total portfolio management (TPM).
> Discuss the advantages and disadvantages of leasing a car.
> What factors should you consider when you aren’t sure whether to buy or lease a car?
> Describe the three approaches to decision making for capital expenditures.
> Contrast the strengths and weaknesses of a fixed-rate mortgage with those of a variable-rate mortgage.
> List and explain the borrowing factors.
> Why is operating leverage as it pertains to risk important?
> Contrast the interests of young people and seniors.
> What is the difference between debt and fixed obligations?
> Investment A costs $10,000,000 and offers a single cash inflow of $13,000,000 after one year. Investment B costs $1,000,000 and will be worth $2,000,000 at the end of the year. The appropriate discount rate or required rate of return is 10 percent compou
> Richard e-mailed me that he and Monica differed about the impact of his extra spending over the past 15 years. He calculated it at about $3,000 a year. He said the total cost of $45,000 was well within his capability to make up. Monica said the cost was
> How would you interact and advise a client with goals you personally find outlandish but that the client values greatly. Creating a mock dialogue could be helpful.
> What would you consider to be the financial equivalent of Maslow’s hierarchy of needs? What are the basics? What comes last?
> What is the difference between feeling sympathy and empathy for the client? Is one more valuable than the other? Why?
> Which types of data should be gathered at an initial interview and which should be left for future meetings?
> 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?
> 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
> Detail five of the concepts that underlie PFP theory.
> 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?
