Starting Early: Retirement and Estate Planning Jamie Lee and Ross now in their fifties, have plenty of time on their hands now that the triplets are away at college. They both realized that time has just flown by; over twenty four years have passed since they married! Looking back over the past years they realized that they have worked hard in their careers, Jamie Lee as the proprietor of a cupcake café and Ross, self-employed as a web-page designer. They have enjoyed raising their family and strived to be financially sound as they are looking to retirement that is just around the corner. The saved regularly and invested wisely over the years. They rebounded nicely from the economic crisis over the past few years, as they watched their investments closely and adjusted their strategies when they felt it necessary. They purchase vehicles with cash and do not carry credit card balances, choosing instead to use them for convenience only. The triplets are pursuing their master’s degrees and have tuition covered through work/study programs at the university. Jamie Lee and Ross are just a few short years from realizing their goals of retiring at 65 and purchasing the home at the beach! Current Financial Situation: Assets (Jamie Lee and Ross combined): Checking account: $5,500 Savings Account: $53,000 Emergency Fund savings account: $45,000 House: $475,000 IRA balance: $92,000 Life Insurance Cash Value: $125,000 Investments (Stocks, Bonds): $750,000 Car: $12,500 (Jamie Lee) and $16,000 (Ross) Liabilities (Jamie Lee and Ross combined): Mortgage balance: $43,000 Credit Card Balance: $0 Car Loans: $0 Income: Jamie Lee: $45,000 gross income ($31,500 net income after taxes) Ross: $135,000 gross income ($97,200 net income after taxes) Monthly Expenses Mortgage: $1,225 Property taxes: $500 Homeowner’s insurance: $300 IRA Contribution $300 Utilities: $250 Food: $600 Gas/Maintenance: $275 Entertainment: $300 Life Insurance: $375 Questions: 1. As Jamie Lee and Ross review their assets, can you tell them which will be valuable to them for income as retirement approaches? 2. Jamie Lee and Ross estimate that they will have one million dollars in liquid assets to withdraw from at the start of their retirement. They plan to be in retirement for thirty years. Using Exhibit 14-5: Dipping into Your Nest Egg chart in this chapter, how much can Jamie Lee and Ross can withdraw each month and still leave their next egg intact? How much can they withdraw each month that will reduce their nest egg to zero? 3. Jamie Lee and Ross have been hearing many stories recently about acquaintances that are passing away without leaving a will, which made Jamie Lee and Ross anxious to review their estate plan with an attorney. They do not want to think about eventually passing on, but they know it is an essential part to careful financial planning. It was suggested that they assemble all of their legal documents in a place where their heirs would be able to access them if necessary. What documents would you suggest that Jamie Lee and Ross make accessible? 4. Jamie Lee and Ross are now having the attorney draw up a will for each of them. What is the purpose of having a will? Do they need to have an attorney to draft a will? What type of will would you recommend they have, based on their marital/family status?
> Joe and Rachel are both retired. Married for 55 years, they have amassed an estate worth $4.4 million. The couple had no trusts or other type of tax-sheltered assets. If Joe or Rachel dies in 2014, how much federal estate tax would the surviving spouse
> The date death for a widow was 2014. If the estate was valued at $7.5 million and the estate was taxed at 40 percent, what was the heir's tax liability?
> Betty and James Holloway invested $71,000 in the Financial Vision Social Responsibility fund. The management fee for this fund is 0.60 percent of the total asset value. Calculate the management fee the Holloways must pay.
> During one three-month period, Matt Roundtop’s mutual fund grew by $6,000. If he withdraws 35 percent of the growth, how much will he receive?
> As Bart Brownlee approached retirement, he decided the time had come to invest some of his nest egg in a conservative fund. He chose the Franklin Utilities fund. If he invests $46,000 and the fund charges a 4.25 percent load when shares are purchased,
> Obtain a mutual fund prospectus to determine the options you can use to purchase and redeem shares. a. Which of the purchase options would appeal to you? Why? b. Assuming that you are now retirement age, which withdrawal option would appeal to you?
> Jan Throng invested $31,000 in the Invesco Charter Mutual Fund. The fund charges a 5.50 percent commission when shares are purchased. Calculate the amount of commission Jan must pay.
> Casper Energy Exploration reports that the corporation’s assets are valued at $185,000,000, its liabilities are $80,000,000, and it has issued 6,000,000 shares of stock. What is the book value for a share of Casper stock?
> Ford Motor Company has a 1.35 beta. If the overall stock market increases by 6 percent, how much will Ford Motor Company change?
> Currently, Boeing pays an annual dividend of $2.92. If the stock is selling for $128, what is the dividend yield?
> When Jill Thompson received a large settlement from an automobile accident, she chose to invest $146,000 in the Vanguard 500 Index fund. This fund has an expense ratio of 0.17 percent. What is the amount of the fees that Jill will pay this year?
> As part of his 401(k) retirement plan at work, Ken Lowery invests 5 percent of his salary each month in the Capital Investments Lifecycle fund. At the end of this year, Ken’s 401(k) account has a dollar value of $36,400. If the fund charges a 12b-1 fee
> In September, the board of directors of Chaparral Steel approved a 2-for-1 stock split. After the split, how many shares of Chaparral Steel stock will an investor have if she or he owned 400 shares before the split?
> Prepare a list of questions you could use to interview an account executive about career opportunities in the field of finance and investments.
> How will your spending patterns change during your retirement years? Compare your spending patterns with those shown in Exhibit 14-2.
> Prepare a written report of personal information that would be helpful to you and your heirs. Be sure to include the location of family records, your military service file, and other important papers; medical records; bank accounts; charge accounts; loc
> 1. In the past, many workers chose to stay with their employer until retirement. What was the major reason for employees’ loyalty? 2. How did Maureen amass $1.4 million for retirement, while Therese could only accumulate $553,000? 3. Why do women need t
> For many investors, mutual funds have become the investment of choice. In your own words, describe why investors purchase mutual funds.
> What are the four major types of taxes to consider in estate planning?
> What are the four major types of trusts?
> What is the difference between a revocable and an irrevocable trust?
> Why should you name a guardian?
> What are responsibilities of an executor?
> What are the four basic types of wills?
> What is a will?
> List some important documents you will need to collect and organize.
> What are the two stages in planning your estate?
> Research Information Available from Morningstar 1. What other investment information would you need to evaluate this fund? Where would you obtain this information? 2. Assuming you purchased shares in the Oakmark Global Select I Fund on May 23, 2014, an
> What is estate planning?
> What might you do if your expenses during retirement are higher than you expected?
> What options can be used to purchase shares in or withdraw money from an open-end mutual fund?
> In the table below indicate how each of the key terms affects a mutual fund investment and how each would be taxed. Key Term Effect on a Mutual fund Investment Туре of Taxation Income dividends Capital gain distributions Capital gains
> In your own words, describe the difference between a managed fund and an index fund. Which one do you think could help you achieve your investment goals?
> Describe how each of the following sources of investment information could help evaluate a mutual fund investment. Source of Information Type of Information How This Could Help The Intermet Professional advisory services Mutual fund prospectus Mut
> How can choosing the right fund help you save for retirement?
> What expenses are likely to increase during retirement?
> How important is the investment objective as stated in a mutual fund’s prospectus?
> What is an expense ratio? Why is it important?
> Research Information Available from Value Line 1. What other investment information would you need to evaluate Disney common stock? Where would you obtain this information? 2. Assuming you purchased Disney stock on February 7, 2014 and based on your ans
> Closed end, exchange-traded, or open ended mutual funds are available today. Describe the differences between each type of fund.
> Describe each of the following investment techniques. Buy and hold Dollar-cost averaging Direct investment Dividend reinvestment Margin Selling short Options
> Explain the important characteristics of each of the following types of stock transaction orders. Market order Limit order Stop-loss order
> What is the difference between the primary market and the secondary market? What is an initial public offering (IPO)?
> Write the formula for the following stock calculations, and then describe how this formula could help you make a decision to buy or sell a stock. //
> Explain the relationship between earnings and a stock’s market value.
> What is the difference between a prospectus and an annual report?
> Describe how each of the following sources of information could help you evaluate a stock investment. Source of information Type of Information How Could This Help The Internet Stock advisory services A newspaper Government publications Business per
> Why do corporations sell stock? Why do investors purchase stock?
> From an investor’s viewpoint, what is the difference between common stock and preferred stock?
> Why do corporations split their stock? Is a stock split good or bad for investors?
> After researching Valero Energy common stock, Sandra Pearson is convinced the stock is overpriced. She contacts her account executive and arranges to sell short 300 shares of Valero Energy. At the time of the sale, a share of common stock had a value o
> Bob Orleans invested $3,000 and borrowed $3,000 to purchase shares in Verizon Communications. At the time of his investment, Verizon was selling for $45 a share. a. If Bob paid a $30 commission, how many shares could he buy if he used only his own money
> For four years, Marty Campbell invested $4,000 each year in Harley Davidson. The stock was selling for $36 in 2011, $45 in 2012, $52 in 2013, and $70 in 2014. a. What is Marty’s total investment in Harley Davidson? b. After four years, how many shares do
> Three years ago, James Matheson bought 200 shares of a mutual fund for $23 a share. During the three-year period, he received total income dividends of $0.92 per share. He also received total capital gain distributions of $0.80 per share. At the end o
> Jason Mathews purchased 300 shares of the Hodge & Mattox Energy fund. Each share cost $14.15. Fifteen months later, he decided to sell his shares when the share value reached $17.10. a. What is the amount of his total initial investment? b. What was
> The Yamaha Aggressive Growth fund has a 1.83 percent expense ratio. a. If you invest $55,000 in this fund, what is the dollar amount of fees that you would pay this year? b. Based on the information in this chapter and your own research, is this a low,
> Analysts that follow JP Morgan Chase, one of the nation’s largest providers of financial services, estimate that the corporation’s earnings per share will increase from $5.56 in the current year to $6.12 next year. a. What is the amount of the increase
> Michelle Townsend owns stock in National Computers. Based on information in its annual report, National Computers has reported after-tax earnings of $9,700,000 and has issued 7,000,000 shares of common stock. The stock is currently selling for $32 a sh
> Ruby is 25 and has a good job at a biotechnology company. She currently has $10,000 in an IRA, an important part of her retirement nest egg. She believes her IRA will grow at an annual rate of 8 percent, and she plans to leave it untouched until she ret
> 1. It has been suggested by Jamie Lee and Ross’ professional investment counselor to perform a financial check-up as the first step in investing in mutual funds, even though they are investing $50,000 that was inherited from Ross’ late uncle’s estate. I
> Wanda Sotheby purchased 120 shares of Home Depot stock at $82 a share. One year later, she sold the stock for $74 a share. She paid her broker a $34 commission when she purchased the stock and a $39 commission when she sold it. During the 12 months sh
> Sarah and James Hernandez purchased 140 shares of Macy's stock at $57 a share. One year later, they sold the stock for $61 a share. They paid a broker $8 commission when they purchased the stock and a $12 commission when they sold the stock. During th
> The Western Capital Growth mutual fund has Total assets: $750,000,000 Total liabilities: $7,200,000 Total number of shares: 24,000,000 What is the fund’s net asset value (NAV)?
> Over a four-year period, LaKeisha Thompson purchased shares in the Oakmark I Fund. Using the following information, answer the questions that follow. You may want to review the concept of dollar cost averaging in Chapter 12 before completing this probl
> Assume that one year ago, you bought 120 shares of a mutual fund for $33 a share, you received a $0.60 per-share capital gain distribution during the past 12 months, and the market value of the fund is now $38 a share. a. Calculate the total return for y
> Prepare a chart that describes the similarities among the long-term and short-term investment strategies described in this chapter.
> Choose either the Invesco Charter (symbol CHTRX) mutual fund or the Fidelity Fifty (symbol FFTYX) mutual fund. Then describe how each of the following sources of information could help you evaluate one of these funds. a. The Internet b. Professional
> What is the difference between the dividend yield and total return calculations that were described in this chapter?
> Explain the relationship between earnings per share, projected earnings, and the market price for a share of stock.
> 1. Corporations sell common stock to finance their business start-up costs and help pay for expansion and their ongoing business activities. 2. A corporation must pay dividends to stockholders. 3. The record date is the date when a stockholder must be r
> 1. You can’t predict exactly how much money you’ll need when you retire 2. Social Security is an important source of retirement income for most Americans. 3. A defined-contribution plan does not guarantee any particular benefit at retirement. 4 .An execu
> 1. The major reasons why investors purchase mutual funds are professional management and diversification. 2. Shares in a closed-end mutual fund are issued by the investment company only when the fund is organized. 3. Typically, the management fee for a m
> 1. Who elects a corporation’s board of directors? a. Preferred stockholders b. Common stockholders c. The corporation’s top executives d. The corporation’s employees 2. A stock split a. always guarantees that the investor will make money. b. enables man
> 1. The first step in retirement planning is to a. estimate your spending needs. b. estimate the inflation rate. c. evaluate your planned retirement income. d. analyze your current assets and liabilities. 2. Under what retirement plan does your employer
> 1. A mutual fund in which new shares are issued and redeemed by the investment company at the request of investors is called a (n) ____________ fund. a. closed end b. open-end c. load d. no-load 2. Some mutual funds charge 12b-1 fees to defray the cost
> What is the major difference between a regular IRA and a Roth IRA?
> What are the most popular personal retirement plans?
> What are the two basic types of employer pension plans?
> What are four major sources of retirement income?
> In your own words, describe how an investment in common stock could help you obtain your investment goals.
> 1. What is the benefit to Jamie Lee and Ross investing in a company’s IPO? Will they be guaranteed a large return from this investment? At this life stage, would you recommend that Jamie Lee and Ross invest in an IPO? Why? 2. Jamie Lee’s father suggest
> Entering an Industry: A firm (player 1) is considering entering an established industry with one incumbent firm (player 2). Player 1 must choose whether to enter or to not enter the industry. If player 1 enters the industry then player 2 can either accom
> Continuous all pay auction: Consider an all-pay auction for a good worth 1 to each of the two bidders. Each bidder can choose to offer a bid from the unit interval so that Si = [0, 1]. Players only care about the expected value they will e
> Brothers: Consider the following game that proceeds in two steps: In the first stage one brother (player 2) has two $10 bills and can choose one of two options: he can give his younger brother (player 1) $20, or give him one of the $10 bills (giving noth
> Market entry: There are 3 firms that are considering entering a new market. The payoff for each firm that enters is 150 / n where n is the number of firms that enter. The cost of entering is 62. (a) Find all the pure strategy Nash equilibria. (b) Find the
> Mutually Assured Destruction (revisited): Consider the game in section 8.3.3. (a) Find the mixed strategy equilibrium of the war stage game and argue that it is unique. (b) What is the unique sub-game perfect equilibrium that includes the mixed strategy
> Declining Industry: Consider two competing firms in a declining indus- try that cannot support both firms profitably. Each firm has three possible choices as it must decide whether or not to exit the industry immediately, at the end of this quarter, or a
> Centipedes: Imagine a two player game that proceeds as follows. A pot of money is created with $6 in it initially. Player 1 moves first, then player 2, then player 1 again and finally player 2 again. At each player’s turn to move, he has two possible act
> Monitoring: An employee (player 1) who works for a boss (player 2) can either work (W) or shirk (S), while his boss can either monitor the employee (M) or ignore him (I). Like most employee-boss relationships, if the employee is working then the boss pre
> Strategies and equilibrium: Consider a two player game in which player 1 can choose A or B. The game ends if he chooses A while it continues to player 2 if he chooses B. Player 2 can then choose C or D, with the game ending after C and continuing again w
> Entry Deterrence 1: NSG is considering entry into the local phone market in the Bay Area. The incumbent S&P, predicts that a price war will result if NSG enters. If NSG stays out, S&P earns monopoly profits valued at $10 million (net present value, or NP
> Investment in the Future: Consider two firms that play a Cournot competition game with demand p = 100 − q, and costs for each firm given by ci (qi) = 10qi. Imagine that before the two firms play the Cournot game, firm 1 can invest in cost reduction. If i
> The Value of Commitment: Consider the three period example of a player with hyperbolic discounting described in section 8.3.4 with ln(x) utility in each of the three periods and with discount factors = 1 and = 1/2. We solved the optimal consumption p
> The Industry Leader: Three oligopolists operate in a market with inverse demand given by P (Q) = a−Q, where Q = q1+q2+q3, and qi is the quantity produced by firm i. Each firm has a constant marginal cost of production, c and no fixed cost. The firms choo
> Hyperbolic Discounting: Consider the three period example of a player with hyperbolic discounting described in section 8.3.4 with ln(x) utility in each of the three periods and with discount factors 0 < < 1 and 0 < < 1 (a) Solve the optimal choice o
> Agenda Setting: An agenda-setting game is described as follows. The “issue space” (set of possible policies) is an interval X = [0, 5]. An Agenda Setter (player 1) proposes an alternative x ∈ X against the status quo q = 4 After player 1 proposes x, the
> The Tax Man: A citizen (player 1) must choose whether or not to file taxes honestly or whether to cheat. The tax man (player 2) decides how much effort to invest in auditing and can choose ∈ [0, 1], and the cost to the tax man of investing at level
> Playing it safe: Consider the following dynamic game: Player 1 can choose to play it safe (denote this choice by S), in which case both he and player 2 get a payoff of 3 each, or he can risk playing a game with player 2 (denote this choice
> Let i be a mixed strategy of player i that puts positive weight on one strictly dominated pure strategy. Show that there exists a mixed strategy ’i that puts no weight on any dominated pure strategy and that dominates i.
> Refer to the financial statements of Samsung in Appendix A. What does Samsung title its accounts receivable on its consolidated balance sheet? What are Samsung’s accounts receivable at December 31, 2013? Samsung’s Fin
