Lesson Four Homework Chapter 9 Problem And Activities 3

Lesson Four Homeworkchapter 9 Problem And Activities #3, #: Joetta H

Joetta Hernandez is a single parent with two children and earns $45,000 a year. Her employer’s group life insurance policy would pay 2.5 times her salary. She also has $60,000 saved in a 401(k) plan, $5,000 in mutual funds, and a $3,000 CD. She wants to purchase term life insurance for 15 years, until her youngest child is self-supporting. She is not concerned about her outstanding mortgage, as the children would live with her sister in the event of Joetta’s death.

Assuming she can receive a 3 percent after-tax, after-inflation return on insurance proceeds, use the earnings multiple method to calculate her insurance need. How much more insurance does Joetta need to buy? What other information would you need to know to use the needs approach to calculate Joetta’s insurance coverage?

Virgil Cronk wants to purchase a life insurance policy that will allow him to increase his future coverage without having to take another medical exam. Virgil’s family has a health history of cardiac problems. Name at least two policy riders that he should consider adding to his policy.

The Baulding family has a basic health insurance plan that pays 80 percent of out-of-hospital expenses after a deductible of $250 per person. If three family members have doctor and prescription drug expenses of $980, $1,840, and $220, respectively, how much will the Baulding family and the insurance company each pay? How could they benefit from a flexible spending account established through Mr. Baulding’s employer? What are the advantages and disadvantages of establishing such an account?

Jody Solan currently insures her home for 100 percent of its replacement value with an HO-3 policy. For Jody, this works out to $140,000 in dwelling (Part A) coverage. What are the maximum dollar coverage amounts for Parts B, C, and D of her homeowner’s policy?

Keith and Dena Diem have personal property coverage with a $250 limit on currency, a $1,000 limit on jewelry, and a $2,500 limit on gold, silver, and pewter. They do not have a personal property floater. If $500 in cash, $2,400 of jewelry, and $1,500 of pewterware were stolen from their home, what amount of loss would be covered by their homeowner’s policy? If the Diems’ deductible is $250, how much will they receive on their claim?

Everyone needs an emergency fund. Assume your best friend asks you to evaluate a list of investments for an emergency savings fund. Comment on the appropriateness of each of the following: a. Certificate of deposit b. Three-month Treasury bills c. Gold and silver coins d. Portfolio of energy stocks e. Money market mutual fund

Jana just found out that she is going to receive an end-of-year bonus of $40,000. She is in the 35 percent marginal tax bracket. Calculate her income tax on this bonus. Now assume that instead of receiving a bonus, Jana receives the $40,000 as a long-term capital gain. What will be her tax? Which form of compensation offers Jana the best after-tax return? Would your calculation be different if the gain was short-term rather than long-term?

The Haley Corporation has just announced year-end results as follows: Value of company assets $12,500,000; Value of company liabilities $6,500,000; Net income $1,600,000; Common stock dividends $250,000; Preferred stock dividends $400,000; Number of shares of common stock outstanding 1,000,000; Closing price of Haley Corporation’s stock $45.00 per share. Calculate the following: a. Book value per share. b. Earnings per share. c. Dividend yield. d. Market-to-book ratio.

An investor is considering purchasing a bond with a 5.5 percent coupon interest rate, a par value of $1,000, and a market price of $927.50. The bond will mature in 9 years. Based on this information, answer the following questions: a. What is the bond’s current yield? b. What is the bond’s approximate yield to maturity? c. What is the bond’s yield to maturity using a financial calculator?

List and explain the seven advantages associated with owning a mutual fund. Which of these advantages relate to Principle 8? How?

Calculate the net asset value (NAV) for a mutual fund with the following values: Market value of securities held in the portfolio = $1.2 billion; Liabilities of the fund = $37 million; Shares outstanding = 60 million.

Jazmin earned $51,250 this year. Calculate her total FICA contribution for the year. How much did her employer pay toward FICA?

Grady Zebrowski, age 25, just graduated from college, accepted his first job with a $50,000 salary, and is already planning for retirement in 40 years. He assumes a 3.5 percent inflation rate and plans to live in retirement for 20 years. He does not want to rely on Social Security benefits. Assume he can earn an 8 percent rate of return on his investments before retirement and a 5 percent rate of return afterward. Using your financial calculator, answer the following: a. How much income in today’s dollars does he need to replace 90 percent of his current income? b. Adjusting for taxes, how much does he really need per year at retirement? c. Adjusting for inflation, how much will he need per year in future dollars when he begins retirement? d. How much does he need in total for retirement? e. How much does he need to save per month to reach his retirement goal, assuming no employer match?

Paper For Above instruction

The comprehensive financial planning process begins with assessing an individual's current financial situation, including income, expenses, assets, and liabilities. It is essential to determine adequate coverage to mitigate risks, such as life insurance, health insurance, and retirement plans. This paper explores various aspects of financial security, including life insurance needs calculation, health insurance benefits, homeowners' insurance, emergency funds, investments, taxes, and retirement planning to provide a holistic overview.

Life Insurance Needs Analysis

Joetta Hernandez's case illustrates the importance of evaluating life insurance requirements. She earns $45,000 annually and has savings in various instruments. The goal is to determine her adequate life insurance coverage using the earnings multiple method, which involves multiplying her annual income by a factor reflecting her financial needs and risk factors. Given her income, her employer's policy pays 2.5 times her salary, resulting in a $112,500 benefit. However, her existing savings and assets need consideration to avoid underinsurance.

Assuming she can obtain a 3% post-tax, post-inflation return, the method entails calculating the necessary insurance coverage to provide for her children’s future and her dependents’ needs during her 15-year term. Typically, her income replacement need would approximate her annual income multiplied by the number of years she wishes coverage for, adjusted for inflation and post-tax returns.

Her existing assets, such as her $60,000 in a 401(k), reduce her insurance requirement. The additional amount she needs can be found by subtracting her existing assets and expected insurance benefits from her calculated coverage need. For complete accuracy, other factors like her outstanding debts (excluding her mortgage) and future income expectations must be considered.

Other Methods and Additional Information

The needs approach involves a personalized assessment, requiring data such as her mortgage obligations, future income, college expenses for her children, and her anticipated retirement needs. These elements help estimate total coverage required and protect against financial difficulties upon her death.

Life Insurance Riders and Long-term Planning

Virgil Cronk, intending to increase future coverage without further medical exams, should consider riders like the Guaranteed Insurability Rider, which permits additional coverage without medical exams; and Accelerated Death Benefit Riders, which provide early access to death benefits in case of terminal illness. Given the family history of cardiac problems, these riders enhance the policy's flexibility and address potential health risks.

Health Insurance and Flexible Spending Accounts

The Baulding family’s plan covers 80% of out-of-hospital expenses after a $250 deductible. Calculations of individual expenses show how much each family member's medical bills are covered. For example, expenses of $980, $1,840, and $220 result in family member payments after deducting the deductible and applying coverage percentages. Establishing a flexible spending account (FSA) could enable pre-tax contributions for healthcare expenses, saving tax dollars and increasing disposable income. Benefits include tax savings, but disadvantages involve potential forfeiture of unused funds and limited contribution flexibility.

Homeowners Insurance Coverage Limits

Jody Solan’s homeowner’s policy insures her home for $140,000, representing 100% of its replacement value. Typically, Parts B, C, and D cover personal property, liability, and additional living expenses. For her coverage, limits are proportional to her dwelling coverage, unless specific floaters are added. Key considerations include understanding policy limits to avoid underinsurance and ensuring adequate liability protection.

Personal Property Coverage

Keith and Dena Diem’s personal property coverage includes limits on specific items. A theft of cash, jewelry, and pewterware results in partial coverage based on limits. With the deductible, their claim payout is reduced accordingly. They could consider personal property floaters for broader coverage, especially for valuable items exceeding standard limits.

Emergency Fund Fundamentals

Effective emergency funds should be liquid, low-risk, and sufficient to cover three to six months of living expenses. Investments like CDs and Treasury bills are suitable due to low risk and liquidity. Gold and silver coins are less ideal for emergencies due to volatility; energy stocks and mutual funds may be more volatile or less liquid, making them less appropriate.

Tax Considerations and Investment Choices

Jana’s bonus taxed at her marginal rate of 35% results in a tax of $14,000. Alternatively, as a long-term capital gain, the tax rate would be lower, approximately 20%, resulting in a tax of $8,000, making this method more tax-efficient. Short-term capital gains would be taxed higher, similar to her marginal rate. This comparison demonstrates the tax benefits of long-term investment strategies.

Financial Ratios and Company Valuations

For Haley Corporation, calculating book value per share involves dividing stockholders’ equity by shares outstanding. Earnings per share is calculated by dividing net income by shares outstanding. Dividend yield measures annual dividends relative to stock price. Market-to-book ratio compares market value to book value, giving insights into stock valuation.

Bond Investing and Yield Calculations

For the bond, the current yield is the annual interest divided by the market price. Approximate yield to maturity considers the total return assuming the bond is held to maturity, factoring in the price difference and interest payments. Using financial calculators, more precise yields can be obtained, aiding investment decisions.

Advantages of Mutual Funds and NAV Calculation

The seven advantages of mutual funds include diversification, professional management, liquidity, affordability, transparency, diversification, and convenience. These features relate to Principle 8, emphasizing prudent investment choices and risk management. The Net Asset Value (NAV) is calculated by subtracting liabilities from the total market value of assets and dividing by shares outstanding, indicating the per-share value of the fund.

Tax and Retirement Planning

Jazmin’s FICA contributions are calculated based on her earnings, with her employer sharing in the contributions. For Grady Zebrowski, planning involves estimating future income needs, considering inflation, expected investment returns, taxes, and saving requirements. Deriving the proper savings rate ensures sufficient resources for retirement, aligning with his life expectancy and planned lifestyle.

In conclusion, comprehensive financial planning encompasses evaluating insurance needs, managing health and property risks, creating emergency funds, optimizing investment strategies, and preparing for retirement. Each component requires careful analysis, tailored to individual circumstances, to secure financial stability and growth over time.

References

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• Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Wiley Finance.
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• Investopedia. (2023). Life Insurance Riders. https://www.investopedia.com
• McClure, R. (2019). Personal Finance. McGraw-Hill Education.
• Morningstar. (2023). Mutual Funds. https://www.morningstar.com
• Schiller, R. (2018). Financial Markets and Portfolio Management. McGraw-Hill.
• U.S. Department of Labor. (2022). Social Security and Medicare. https://www.socialsecurity.gov
• Vanguard. (2023). How NAV Works. https://investor.vanguard.com
• White, G. I., Sondhi, A. C., & Fried, D. (2014). The Analysis and Use of Financial Statements. Wiley.