Investment Planning

Chapter 11: Investment Planning

1. Calculate amount to invest to meet objectives. Use worksheet 11.1. Phoebe Jones is now employed as the managing editor of a well-known business journal. Although she thoroughly enjoys her job and the people she works with, what she would really like to do is open a bookstore of her own. She would like to open her store in about eight years and figures open her store in about eight years and figures she’ll need about $50,000 in capital to do so. Given that Phoebe thinks she can make about 10 percent on her money, use Worksheet 11.1 to answer the following questions.
2. How much would Phoebe have to invest today, in one lump sum, to end up with $50,000in eight years?
3. If she’s starting from scratch, how much would she have to put away annually to accumulate the needed capital in eight years?
4. If she already has $10,000 socked away, how much would she have to put away annually to accumulate the required capital in eight years?
5. Given that Phoebe has an idea of how much she needs to save, explain how she could use an investment plan to help reach her objective.
6. Finding and applying market index quotes. Using resources like The Wall Street Journal or Barron’s (either in print or online), find the latest values for each of the following market averages and indexes, and indicate how each has performed over the past six months:
7. DJIA
8. S&P 500
9. NASDAQ Composite
10. S&P MidCap 400
11. Dow Jones Wilshire 5000
12. Russell 2000

7. Interpreting stock report information. Using the Value Line Investment Survey report in Exhibit 11.5, find the following information for Apple.
8. What was the amount of revenues (i.e., sales) generated by the company in 2017?
9. What were the latest annual dividends per share and dividend yield?
10. What is the earnings per share (EPS) projection for 2019?
11. How many shares of common stock were outstanding?
12. What were the book value per share and EPS in 2017?
13. How much long-term debt did the company have in the third quarter of 2018?
14. Tracking portfolio performance. Use Worksheet 11.2 to help Max and Heidi Wood, a married couple in their early 30s, evaluate their securities portfolio, which includes these holdings.
15. (NYSE; symbol IBM): 100 shares bought in 2011 for $170.40 per share.
16. Procter & Gamble (NYSE; symbol PG): 150 shares purchased in 2010 at $61.85 per share.
17. Google (NASDAQ; symbol, GOOG): 200 shares purchased in 2014 at $519.98 per share.
18. The Woods also have $8,000 in a one-year CD they bought one year ago, which pays 1.25 percent annual interest.
19. Based on the latest quotes obtained from the internet, complete Worksheet 11.2.
20. What’s the total amount the Woods have invested in these securities, the annual income they now receive, and the latest market value of their investments?

Chapter 13: Investing in Mutual Funds, ETFs, and Real Estate

1. Choosing between a mutual fund and an ETF. Lilly Hughes is considering whether she should invest some extra money in a mutual fund or an ETF. Explain the key factors that should influence her decision.
2. Building a mutual fund portfolio. Imagine that you’ve just inherited $40,000 from a rich uncle. Now you’re faced with the problem of deciding how to spend it. You could make a down payment on a condo – or better yet, on that BMW that you’ve always wanted. Or you could spend your windfall more profitably by building a mutual fund portfolio.

Let’s say that, after a lot of soul-searching, you decide to build a mutual fund portfolio. Your task is to develop a $40,000 mutual fund portfolio. Use actual funds and actual quoted prices, invest as much of the $40,000 as you possibly can, and be specific! Briefly describe the portfolio that you end up with, including the investment objectives that you’re trying to achieve.

5. Comparing risks of different mutual fund types. For each pair of funds listed below, select the fund that would be the least risky and briefly explain your answer.
6. Growth versus growth-and-income
7. Equity-income versus high-grade corporate bonds
8. Intermediate-term bonds versus high-yield municipals
9. International versus balance
10. Calculating approximate yield on mutual fund. About a year ago, Elliot Cox bought some shares in the Axis Fund. He bought the fund at $24.50 a share, and it now trades at $26.00. Last year, the fund paid dividends of 40 cents a share and had capital gains distributions of $1.83 a share. Using the approximate yield formula, what rate of return did Elliot earn on his investment? Repeat the calculation using a financial calculator. Would he have made a 20 percent rate of return if the stock had risen to $30 a share?
11. Investing in residential income-producing property. Leah Reyes is thinking about investing in residential income-producing property that she can purchase for $200,000. Leah can either pay cash for the full amount of the property or put up $50,000 of her own money and borrow the remaining $150,000 at 8 percent interest. The property is expected to generate $30,000 per year after all expenses but before interest and income taxes. Assume that Leah is in the 24 percent tax bracket. Calculate her annual profit and return on investment assuming that she (a) pays the full $200,000 from her own funds or (b) borrows $150,000 at 8 percent. Then discuss the effect, if any, of leverage on her rate of return. (Hint: Earnings Before Interest & Taxes minus Interest Expenses (if any) equals Earnings Before Taxes minus Income Taxes (at 24 percent) equals Profit After Taxes.)

Chapter 14: Planning for Retirement

1. Retirement planning pitfalls. Explain the three most common pitfalls in retirement planning.
2. Calculating annual investment to meet retirement goal. Use Worksheet 14.1 to help Georgia and Jude Sullivan determine how much they need to retire early in about 20 years. Both have promising careers, and both make good money. As a result, they’re willing to put aside whatever is necessary to achieve a comfortable lifestyle in retirement. Their current level of household expenditures (excluding savings) is around $75,000 a year, and they expect to spend even more in retirement; they think they’ll need about 125 percent of that amount. (Note: 125 percent equals a multiplier factor of 1.25.) They estimate that their Social Security benefits will amount to $20,000 a year in today’s dollars and that they’ll receive another $35,000 annually from their company pension plans. Georgia and Jude feel that future inflation will amount to about 3 percent a year, and they think they’ll be able to earn about 6 percent on their investments before retirement and about 4 percent afterward.

Use Worksheet 14.1 to find out how big the Sullivans’ investment nest egg will have to be and how much they’ll have to save annually to accumulate the needed amount within the next 20 years.

5. Retirement planning. At what age would you like to retire? Describe the type of lifestyle you envision – where you want to live, whether you want to work part-time, and so on. Discuss the steps you think you should take to realize this goal.
6. After tax cost of 401(k) contribution. Luis Gomez is an operations manager for a large manufacturer. He earned $68,500 in 2018 and plans to contribute the maximum allowed to the firm’s 401(k) plan. Assuming that Luis is in the 24 percent tax bracket, calculate his taxable income and the amount of his tax savings. How much did it actually cost Luis on an after-tax basis to make this retirement plan contribution?
7. Deciding whether to convert a traditional IRA to a Roth IRA. Explain the circumstances in which it make sense to convert a traditional IRA to a Roth IRA.
8. Fixed vs. variable annuities. What are the main differences between fixed and variable annuities? Which type is more appropriate for someone who is 60 years old and close to retirement?

Chapter 15: Preserving Your Estate

1. Estate planning objectives. Generate a list of estate planning objectives that apply to your personal family situation. Be sure to consider the size of your potential estate as well as people planning and asset planning. Estate planning is not just about taxes.
2. Qualifications of estate executor. Your best friend has asked you to be executor of his estate. What qualifications do you need, and would you accept the responsibility?
3. Topics in an ethical will. State the topics you would cover in your ethical will. Would you consider recording it digitally?
4. Calculations of estate taxes. Use Worksheet 15.1. When Jackson Holmes died in 2018, he left an estate valued at $15,850,000. His trust directed distribution as follows: $20,000 to the local hospital, $160,000 to his alma mater, and the remainder to his three adult children. Death-related cost were $6,800 for funeral expenses, $40,000 paid to attorneys, $5,000 paid to accountants, and $30,000 paid to the trustee of his living trust. In addition, there were debts of $125,000. Use Exhibits 15.5 and 15.6 to calculate the federal estate tax due on Jackson’s estate.
5. Calculating federal transfer tax on estimate. Ronald Knight died in 2018, leaving an estate of $26 million. Ronald’s wife, Aurora, died in 2015. In 2013, Ronald gave his son Jamie, property that resulted in a taxable gift of 43 million and upon which Ronald paid $885,000 in transfer taxes. Ronald had made no other taxable gifts during his life. His will provided a charitable bequest of $1 million to his church. Determine the federal transfer tax on Ronald’s estate.