The Lee Case Study Questions
PART ONE--FOUNDATIONS IN FINANCIAL PLANNING
Megan and Kevin Lee--The Newlyweds
Megan and Kevin Lee would like your help in starting their financial plan. Review Megan and Kevin's financial and personal information before answering the following questions.
Using the January 1, 2002 asset and liability information, develop a balance sheet for Megan and Kevin Lee. Assume they have no unpaid bills. What is the Lee's net worth?
Using the income and expenditure information for 2001, complete an income and expenses statement for Megan and Kevin. Use the "cash flow" concept for this financial statement including all money inflows as income and all outflows as expenditures. Did Megan and Kevin have a cash surplus or a cash deficit in 2001? What impact does the 2001 cash surplus (deficit) have on the following year=s (January 1, 2002) balance sheet?
Based on Megan and Kevin's financial statements, calculate the following ratios: 1. Savings ratio
2. Liquidity ratio
3. Solvency ratio
4. Debt service ratio
Based on the information in the original case, from Megan and Kevin's financial statements, and from the ratios, list at least 3 positive and 3 negative aspects of the Lee=s current financial position.
After reading Chapters 1 and 2, you probably realize that Megan and Kevin's financial goals are not defined well enough in the original case to serve as the basis for their financial plan and cash budget. Upon further review, Megan and Kevin have restated their financial goals in order of priority as follows: 5. Pay off all existing credit card balances within the next 2 years. 6. Have liquid assets equal to 3 month's net salary within the next 2 years for an emergency fund. 7. Save $10,000 for the purchase of a second car in 3 years. 8. Buy a house within 5 years. Megan and Kevin plan on using the inherited funds that are currently invested in the Fidelity Magellan mutual fund for this goal. 9. Save $6,000 for a down payment on a new car to replace the Explorer within 5 years. 10. Increase contributions to Kevin=s 401(k) plan from 5% to 8% of his gross salary. 11. Have enough accumulated in an account to provide Kevin=s father $12,000 a year during his retirement years. They expect Lyle will retire in 20 years at age 70 and will live 15 years after retirement. Kevin and Megan would like to have all the money accumulated by the time Lyle retires. 12. Establish a regular savings/investment program to accomplish these goals.
Using time value calculations, how much would Megan and Kevin have to save this year to be on track in meeting their goals for: 13. their emergency fund (Remember Megan and Kevin already have some funds in their money market account, money market mutual fund, and savings account. They do not want to consider the money in their checking accounts or cash on hand for this goal.) 14. the second car
15. the down payment for a new car to replace the Explorer 16. the fund for Kevin=s father=s retirement years
Assume Megan and Kevin can earn 2% after inflation and taxes on their emergency fund and 4% after inflation and taxes on the car goals. In figuring the savings required for Kevin=s father=s retirement fund, Megan and Kevin assume that they could earn 7% after taxes and inflation on the money once his father retires. While they are accumulating the money, they feel they can take more risk and earn 9% after taxes and inflation.
Prepare a cash budget for the year of 2002 using the income and expenditure data from the original case as well as the figures needed to meet Megan and Kevin=s goals (from question 5). In addition to the funds needed from question 5, they would need to make monthly credit card payments totaling approximately $633 in order to pay off their current credit card debt within the next 2...
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