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Question 969066: Craig and Susan Miller had just returned from their honeymoon trip in the Whitsundays. They
celebrated their wedding and the successful completion of Susan's MBA degree. Craig is 30 and Susan
is 29 years old. Since the day they tied the knot, Craig's parents have been encouraging the couple to
establish some personal financial goals for their future. The couple is eager to own their own home
and have children in the next 3 years. They intend to seek professional financial advice from a
registered financial planner.
Craig works as a senior electrical engineer for a local manufacturing company and earns a pre-tax
salary of $180,000 per year. Susan is currently employed on a part-time basis as a computer technician
and earns a yearly gross salary of $40,000. In the near future, she intends to pursue a full-time career
as a business manager for a computing firm until their first child arrives. They plan to have two
children with two years apart between them. If she takes up the new career, her gross salary would
increase to $75,000 per year. During your first meeting with them, Craig was quick to point out that he
dislikes financial surprises while Susan indicates that she is willing to take some risk if the investment
returns are worthwhile. Both of them do not spend a great deal of time tracking and understanding
their finances.
Currently, they live in a rented apartment in the eastern suburb of Sydney. They pay a monthly rental
of $4,500 for the 3 bedroom apartment. They are hoping to own their own property in three years
before their first baby arrives. Craig has set aside a small fund for their new home. The money is
invested in a portfolio of blue-chip shares which provide consistent dividends for the last 5 years. The
current market value of the fund is approximately $60,000.
Craig has a savings account balance of $35,000 that earns an annual interest of 5 per cent. He has
received a $2,500 dividend cheque with associated imputation credits of $500. Last week, he received
a lottery winning of $15,000 and an unexpected end-of financial-year bonus to the value of $7,000.
Susan has a cheque account at a local bank. The account has a balance of $4,000 and the bank requires
all customers to keep a minimum amount of $2,000 to earn an annual interest of 1.5 per cent. Craig
and Susan are concerned about the amount of personal income tax and medical levy withheld from
them. They are not entirely convinced that the tax calculations are correct. In their regular weekend
shopping, credit cards are often used. Their combined monthly balance always seems to hover around
$3,500 at all times. They use their card to draw cash from the ATMs to cover their daily household
expenses even though they carry about $300 in cash between them.
Although the first child is not expected until three years later, the Millers are anxious about their
children's tertiary education cost. Susan thinks that they should start thinking about education funding
today. To encourage their children to take up tertiary education in the future, Craig and Susan are
happy to provide for their education. The tertiary program will take 3 years to complete and the
estimated individual tuition fee is $50,000 per year when the children start to attend university. Other
related expenses would cost another $20,000 per year.
The Millers believe they should save and be self-sufficient during retirement but they have yet to
establish a retirement plan. Susan has accumulated $35,000 in her superannuation account while Craig
has $145,000 in his account and has not named the beneficiary. The estimated combined yearly
expenses are as follow:
Other expenses (per annum):
Charles Sturt University Subject Outline
FIN560 201530 SM I-6 February 2015-Version 1 Page of 25 34
Utilities $5,000
Car usage and maintenance $30,000
Food and groceries $10,000.00
Entertainment $8,500
Miscellaneous $5,000
The following information is also available:
• Superannuation dividend payments are approximately 5% indefinitely. In general, an increment of
3% in salary is expected every year.
• The long-term return for equity investment is projected to be around 15% per year, whereas bond
funds are expected to offer yield of 6% per annum. Investment in term deposits will generate average
return of 5% per annum over the next 30 years. Return from low risk managed fund is approximately
7% per year.
• The life expectancy for Craig and Susan are 77 and 85 years old respectively. The children are
expected to be dependent on their parents until they turn 24 years old.
• Craig and Susan are Australian residents.
• For calculation of taxable income, use the relevant tax rates provided by the Australian Taxation
Office (ATO).
• Craig has tallied his work-related expenses for the year to be $5,500, which includes $2,000 for
return bus fare from home to work during the year. He has also donated $600 to CARE Australia.
Susan has work-related expenses of $1,500, tax deductible gifts totalling $800 and paid $200 for tax
return preparation.
• They do not receive fringe benefit from their employers.
• Both Craig and Susan provide approximately 9% superannuation contributions via salary sacrifice
and their respective employers provide another 9.5% contribution into their superannuation funds.
• For the use of credit cards, interest charged for unpaid balance is approximately 24% per annum.
• All debts will be amortised over the period of the loan. Mortgage repayments are made at the end of
each month.
Required
Question 1 - 10 marks
Help the Millers identify their short-term and long term financial goals.
Question 2 - 15 marks
i. Based on the information available to you, construct an income and expense schedule for the
Millers.
ii. Create a net worth statement for the Millers. Comment on whether they have a negative or positive
net worth.
iii. Using information from the above, calculate the following ratios (make sure you make a brief
comment on each ratio).
a. Savings ratio
b. Liquidity ratio
c. Solvency ratio
d. Monthly debt service ratio
For the ratios, use the definitions provided by Taylor and Juchau (2013). Show details of your
calculations.
Question 3 - 10 marks
Assuming 3 years from now, the couple decides to purchase their own property. The estimated
purchase price is $900,000. They are able to obtain a 30 year home loan with 95% financing from the
bank. The home loan has a fixed rate of 7% p.a. for the entire period of the loan.
i. How much do they have to pay the bank every year?
ii. How much do they still owe the bank when the first child goes to university?
(Prepare a full amortisation table for their mortgage and assume the first child attends university at the
age of 18).
Question 4 - 10 marks
The Millers plan to retire in 30 years, and that they expect to live up to their life expectancy. They
want their first retirement payment to be $150,000 per year ($75,000 each) and all subsequent
Charles Sturt University Subject Outline
FIN560 201530 SM I-6 February 2015-Version 1 Page of 26 34
retirement payments are estimated to be equal to the first payment. The retirement payments will begin
the day they retire, 30 years from now.
i. How much do they need to save during each of the next 30 years (equal amounts being made at the
end of each year) to meet their retirement goal?
ii. How much do they need to put aside each year if they outlive their life expectancy (assume the
yearly retirement incomes will be needed in perpetuity).
Annual compounding applies in this question. Use a discount rate of 5% p.a. in your calculations and
consider the effect of inflation in your analysis.
Answer by Fombitz(32388)   (Show Source):
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