F24 ADMS 3541 Case Study Analysis Assignment – Report and Presentation
Due: November 13, 2023 at 11:59pm (Toronto time)
Instructions
• You may work in pairs within the same section. Working in pairs is not a requirement.
o The filenames (both word & video) must include your first and lastname, e.g., Assignment_John_Doe.
e.g., Assignment_John_Doe_Jane_Doe.
o Submit only one copy on eClass if you work as a pair.
o If you do not follow these submission guidelines a penalty will be assessed.
• Written Report (10%):
o Read the following case and answer series of questions.
o If you work with someone else, you must write your names, student numbers and email addresses at the top of each assignment.
o The assignment MUST be submitted as a Word document (.docx file).
o Please organize your responses in a clear, professional format, labeling each section for easy reference.
o Provide concise and clear responses for each section, focusing on analysis and explanation rather than description.
Times New Roman, 11pt, Single-space recommended.
o Show your work.
o All work and answers must be TYPED. No handwritten work.
• Presentation (10%):
o Based on the financial case study you have analysed, you are required to “play” the role of a financial planner and present financial recommendations to the clients. The context is that you are their financial planner, and you arepresenting three actionable items to help them achieve their financial goals (Question 8).
o Your presentation should be between 3 to 5 minutes long and should include 3
recommendations that you have for the clients. The presentation can be uploaded to
YouTube (which is recorded using PPT, Zoom, phone, etc.) and submitted as a link to be examined. Alternatively, you can record the presentation using PowerPoint and submit
PowerPoint file through eClass.
o If working in a pair, both students need to be involved with the creation of the visual materials and presentation.
o Students should have a camera on them when they present.
o It is the student’s responsibility to ensure that the video works and can be viewed by the markers. Iferrors occur, then the student will receive a reduction in marks.
o Suggestions for an effective presentation:
Assume that the individual watching/grading your presentation is the client.
Assume the clients have not yet read your report.
Dress for the role and speak clearly.
Be consistent and present accurate information in a logical sequence.
o Goals:
1. To present financial information using an approach which considers the audience receiving the financial information.
2. To present case recommendations in a professional and concise method with clear explanations.
3. To present information in a structured and accurate manner which summarizes the key findings and recommendations within the case.
4. To adopt appropriate visual aids for the clients and speak inaudible and clear manner
Notes
• Some details will be missing from this case study. Financial planners often have to work with incomplete information. When creating answers to this assignment, you will need to make assumptions. Please clearly state these assumptions and the markers will take these into consideration when marking. Instructor will not be answering any questions.
• Any resemblance to any real person in this assignment is purely coincidental.
Case Study: Financial Planning for Michael and Sarah
Date: January 1, 2024
Michael (31) and Sarah (34) are a married couple living in Ontario, Canada, with one child, a daughter named Emma, who is currently 5 years old. Both are planning for their financial future, hoping to buy a home in four years. Sarah works full-time as a marketing manager for a private firm, while Michael is self-employed as a software engineer and earns income by working on various contracts. Their combined annual gross income is $120,000, with Sarah earning $65,000 annually and Michael earning $55,000.
Both are concerned about their current financial standing, housing goals, and insurance coverage.
Sarah contributes to the Canada Pension Plan (CPP) and Employment Insurance (EI), paying $3,166 annually for CPP and $889 annually for EI. She pays $6,800 in federal taxes and $3,550 in provincial taxes. Michael's self-employment status brings added complexity to their financial situation, as he must manage his own taxes and CPP contributions, in addition to having no access to employer-provided benefits such as disability insurance or pensions. Michael is responsible for his own CPP contributions, paying both the employer and employee portions, which amounts to $6,332 per year. He does not pay into EI because he is self-employed. Michael pays $4,900 in federal and $2,500 in provincial taxes.
Michael and Sarah rent a small apartment for $3,500 per month. Their monthly expenses include $850 on groceries, $300 on utilities and internet, $550 on transportation (covering gas, public transit, and car insurance), and $400 on entertainment and dining out. Additionally, they pay $250 per month for auto insurance. Michael has a student loan balance of $19,000, for which he pays $300 monthly, with six years left on the loan. As both are working, childcare costs are $1,000 per month due to nanny/kindergarten expenses. Each of them contributes $250 per month to their joint savings account. They always pay off their credit card balances in full and only use credit cards for convenience, with the option to stop using them if desired.
They have $5,000 in a joint savings account and $1,000 each in individual checking accounts. Michael holds $3,000 in a TFSA, invested entirely in mutual funds. While Sarah does not currently have a TFSA, she has $5,000 in non-registered investment account entirely in mutual funds. Sarah contributed to her employer-sponsored RRSP, which has a current balance of $15,000 invested in mutual funds. Her employer matches her contributions dollar-for-dollar, up to 10% of her previous year's earnings. Michael, who is self-employed, has accumulated $12,000 in his RRSP, with a 50% allocation in mutual funds and 50% in stocks. They jointly own a car (2018 Honda CR-V) valued at $10,000, which they plan to keep for a few more years before replacing it; there is no outstanding auto loan on the car.
Sarah and Michael are both non-smokers in average health. Sarah receives basic group life insurance and disability insurance through her employer. Her life insurance covers one year of her salary in the event of her death and disability insurance covers up to $4,500 per month, with a 120-day elimination period.
Michael, being self-employed, has no life or disability insurance coverage.
If either Michael or Sarah were to pass away, their household expenses would be significantly impacted. The following changes in expenses would occur:
• Groceries and transportation expenses would be reduced by 30%.
• Entertainment expenses would be reduced by 40%.
• Monthly savings would be eliminated entirely.
• Childcare expenses would be as follows in today’s dollars:
o From now until age 17: $12,000 annually
o Ages 18-21: $20,000 annually
o After age 22: eliminated
• Other expenses would remain the same in today’s dollars.
Michael and Sarah aim to purchase their first home within the next four years. They already have a specific property in mind, which is currently valued at $725,000. To qualify for a conventional mortgage, they plan to make a 20% down payment. For the remaining balance, they anticipate a mortgage with a 6.25% annual interest rate (compounded semi-annually), a 20-year amortization period, and a 5-year term. They estimate annual property taxes at approximately $6,000 and monthly heating costs around $120. With property prices expected to increase at an annual rate of 3%, they recognize the importance of timely action.
Michael and Sarah plan to use the funds currently in Michael’s TFSA and Sarah’s non-registered investment account toward their down payment. Over the next four years, Michael will contribute $7,000 annually to his TFSA, and Sarah will add $17,000 each year to her non-registered investment account, with both contributions made at the end of each year. Additionally, Sarah’s parents have offered $50,000 to support their down payment, which will be deposited into Sarah’s non-registered investment account one year from today.
Assumptions:
• Their costs (including anticipated property tax and heating) and wages (both gross income & take-home pay) will increase at an inflation rate of 2.5%.
• Any of their investments will earn a before-tax rate of return of 6% p.a. or after-tax rate of return of 4% p.a.
Required:
1. Prepare a combined balance sheet and monthly cash flow statement for Michael and Sarah.
Create a balance sheet showing their assets and liabilities, and a cash flow statement detailing their income and expenses.
2. Calculate the liquidity ratio, asset-to-debt ratio, debt payments-to-net income ratio, consumer debt ratio, and investment assets-to-total assets ratio.
Explain what these ratios mean for Michael and Sarah in everyday language. Identify if these ratios indicate any areas of concern and explain why or why not.
3. Calculate whether Michael and Sarah will have saved enough for a down payment on a house in four years based on their current plan.
4. Analyze their mortgage eligibility under the stress test.
Explain how the stress test will affect their eligibility for a mortgage. Use the TDS (Total Debt Service) ratio of 44% to evaluate whether Michael and Sarah can comfortably afford the target amount of mortgage.
5. The TFSA is not the only option for funding the down payment. They could access funds in their RRSP through the Home Buyers' Plan (HBP), and they can also utilize the First Home Savings Account (FHSA), introduced in 2023, for this purpose. Compare the key characteristics of these three options: (1) TFSA, (2) RRSP HBP, and (3) FHSA. Which option do you believe is the most advantageous to this family, and what is your justification for this choice?
6. Identify at least five risks Michael and Sarah face and evaluate the severity and frequency of each risk identified. Propose appropriate risk mitigation strategies for each identified risk.
7. Using the expense approach, calculate life insurance needs for Michael and Sarah each. Following is additional information needed to apply the expense approach.
They want to set aside CPP payments for emergencies and retirement. Thus, exclude survival/child CPP pension in your calculation.
Assume each will become financially independent in their retirement years. They are expected to retire at age 65.
Hints: Use after-tax real discount rate. Expenses will increase, matching inflation.
8. Provide three recommendations with actionable items for Michael and Sarah to address their concerns or improve their financial position.
Use the analysis from the case study to support your recommendations.