Case Study: James and Olivia

Case Study: James and Olivia.

Description / Requirements
This assessment contains THREE (3) TASKS. Each Task has multiple parts and all parts should be answered in order to achieve the full marks out of 100. Note that the marks out of 100 will be converted to 60% of your final grade. Additionally, there is a hurdle requirement on this assessment meaning that you will need to achieve at least 60% or more to pass this unit. For calculations, I would recommend showing as many steps as possible in your calculation and working.
Some guidance and advice to ensure the successful completion of the assessment:
1) Your responses should be written clearly and concisely within a single word document.
2) Where applicable, state all your assumptions.
3) Your answers should follow the following minimum format:
i. Title Page which will include formal title; your name
ii. Table of Contents including headings and subheadings and page numbers
iii. Task 1 – Case Study: James and Olivia
iv. Task 2 – Case Study: Lucy and Patrick
v. Task 3 – Personal Case Study
vi. References (use the Harvard style of referencing).
4) Maximum Words: 2,000 (excluding Title Page, Table of Contents, References, Appendices).
Please note that poor presentation/formatting, going over the overall word limit by more than 10%, or failure to follow instructions may result in a penalty of marks of up to 10%.
The word count in each section is only an indication of how long your answer should be at most. If you go over or under it is fine as long as your overall report is within the 2,000 maximum word count (not including tables and references).

Task 1 – Case Study: James and Olivia (28 marks)
James is aged 42 and Olivia is aged 38. Olivia works a stay-at home mum whilst James runs his own consulting firm from an inner suburban office, which produces an average net profit of $150,000 before tax. They have two children, aged 8 and 10 whom they expect will remain dependent until age 24 at which time the living expenses will decrease by $13,000 p.a. for each child when they leave home. They own their own house worth $1,000,000, which is subject to a mortgage of $275,000. They also own an investment property worth $900,000, which is subject to a mortgage of $650,000. They also have an outstanding credit card debt of $12,000. Both James and Olivia own their own cars. The couple’s living expenses total $84,000 p.a. including payment of a $27,600 p.a. annual mortgage payment. The couple would like to send the children to a private school from years 9 – 12 which is expected to cost $160,000 in total. In event of death of either James or Olivia, they estimate death and medical expenses to cost around $12,000. James currently has life cover of $150,000 in his superannuation fund (his current superannuation fund balance is $225,000) whilst Olivia has no life cover, also they have no other personal insurances. James’ father passed away recently at age 67 as a result of heart disease, which seems to be a hereditary problem in James’ family.
a) What type of insurance policies would you recommend for James and Olivia to protect their personal risks? Discuss the merits for each of the types of insurance policies. (max. 400 words)
(8 marks)
b) Calculate how much additional life insurance might be recommended for James? Assume that coverage is required through to current life expectancy (85 for females, 81 for males). Further assume the reinvestment rate is 8% per annum.
(12 marks)
c) You note that James’ existing life cover is in his superannuation fund. Discuss the advantages and disadvantages having his life cover within his superannuation fund as against having it in his own name? (max. 250 words)
(8 marks)
Task 2 – Case Study: Lucy and Patrick (32 marks)
Lucy and Patrick, aged in their early 30’s, own their own home worth $1,000,000 and each have a car worth approximately $30,000 each. They have the following investment assets:
Item Amount Ownership
Investment Property $900,000 Tenants-In-Common
Cash at bank $200,000 Joint
Term deposit – 2 year fixed $15,000 Patrick
Shares – Australian, blue-chip shares acquired in 2016 for $20,000 $80,000 Lucy
Managed fund – Aust. Shares acquired in 2015 for $15,000 $25,000 Lucy
Superannuation (both have binding death nomination clauses) $300,000
$125,000 Lucy
• The couple’s superannuation accounts are invested in a growth fund with the following allocations: Cash 5%; Fixed interest 25%; Aust shares 35%, Property 10%; International shares 25%.
• Lucy earns $105,000 p.a. and Patrick earns $50,000 p.a. working part-time. The couple have 2 children aged 16 and 18 years old.
• The couple’s risk profile has been determined as conservative.
a) Determine the couple’s overall investment asset allocation using the following table format. Note that your Excel spreadsheet needs to be ‘embedded’ into your report.
(9 marks)
Name of investment Cash Fixed interest Property Australian shares International shares Total

Total – $
Total – %
b) Is the couple’s current asset allocation consistent with their risk profile? If not, what would be your suggestions as to an appropriate asset allocation for the couple? If you decided that the couple’s portfolio was overweight in a particular asset class, what problems might be encountered in re-balancing? (max. 250 words)
(8 marks)
c) Lucy and Patrick are considering purchasing the ASX listed stock Xero Limited (XRO). They notice that Xero has a very high price-to-earnings (P/E) ratio relative to other Australian stocks such as Woolworths (WOW). Holding all else equal, does a high P/E ratio necessarily mean that Xero is a bad investment relative to other stocks with lower P/E ratios? Why, why not? (max. 200 words)
(9 marks)
d) Advise as to whether the investments are estate or non-estate assets. Should they re-structure such that all the assets are estate assets? (max. 200 words)
(6 marks)
Task 3 – Personal Case Study (40 marks)
As a prospective financial advisor studying MAA255 Financial Planning, before you start coming up with financial plans for others, it might be worthwhile to start a financial plan for yourself. Thus, in this task you will take on the role of both the client and the planner and will be thinking about your retirement. If you do make any additional assumptions along the way do state them explicitly. Here are some assumptions to start you off:
• A graduate in financial planning on average, earns about $55,000 a year, you can assume that this amount is your starting salary package (i.e. it includes the superannuation guarantee contribution).
• Your salary itself is expected to increase by 2.5% per year that accounts for increases due to the CPI and any promotions throughout your lifetime.
• You can assume the tax rates to remain constant, and that inflation (CPI) is 2% per annum.
• Your superannuation funds are invested in a growth option. The growth option is expected to generate a net return of 5.0% per annum (net of tax and fees) for the foreseeable future.
Note that for each part, your Excel spreadsheet needs to be ‘embedded’ into your report. See Week 11 lecture recording…
a) You aim at building wealth between now and when you retire within your superannuation fund. One of your goals is to retire on your 65th birthday. Prepare an Excel spreadsheet showing the amount of accumulated superannuation for each year through till retirement. You should use the table below as a sample to illustrate the accumulation of your superannuation fund to retirement. You can assume the tax rates remain constant and that you make no further contributions or savings towards retirement. (maximum 100 words).
(12 marks)
Year Age Salary
($) Opening
Balance ($) Superannuation
Contributions ($) Contributions
Tax (15%) Add Earnings
(Net of tax & fees) Closing
2021 … 55,000 0 … … … …

Task 3 (continued)
b) As part of your retirement, you would like to have maintain a certain quality of life and you believe that you will require the equivalent of $60,000 per annum in today’s dollars (i.e. before adjusting for inflation) from your superannuation fund when you retire.
Based on your answer in Part (a), discuss and justify whether your accumulated fund is enough for your retirement needs. You will need to complete an Excel spreadsheet illustrating the withdrawal of the accumulated superannuation commencing retirement. You should use the below column headings in your spread sheet to illustrate the reduction / balance of your retirement funds.
Regardless of whether the funds were or weren’t enough to fund your retirement in its entirety, calculate how much you would need at the commencement of your retirement to meet all of your retirement needs through to the end of your expected life. (maximum 100 words)
(16 marks)
Year Age Opening Pension balance Less pension withdrawal (real income required) Add net earnings (Net of Tax & Fees) Closing Pension balance
20xx 65 … … … …

c) Discuss two strategies you might adopt to help improve your financial situation in retirement. (maximum 500 words)
(12 marks)

Case Study: James and Olivia


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