Complete a project that helps you apply theoretical knowledge of financial planning to practical applications. It is a proven fact that learning by doing is more effective than reading theory. This project will help you apply your learning from the course in your career as a financial planner, or you may just be able to plan finances for yourself.
Bob and Leah Stevens have come to you seeking help in financial planning because they realized they could no longer ignore their finances.
Bob is 35 years old and has a Ph.D. in material science. He earned his bachelor's degree in Nuclear Science and learned about electric power generation while working at a nuclear power plant in college. Thirty-two-year-old Leah has a master's degree in engineering. They met at the University of Michigan and ended up working together on Bob's doctoral thesis. Bob developed a breakthrough, energy-saving fuel cell that would replace batteries and last much longer, consuming less energy.
Five years ago, Bob and Leah founded Flexible Materials Inc. Bob's ideas caught the attention of the Pentagon. Before the Stevenses knew it, Flexible Materials Inc. started providing fuel cells to the military. The Pentagon started ordering more fuel cells than Flexible could produce. Bob and Leah started hiring workers, and now they have 18 people assembling fuel cells. Bob and Leah spend most of their waking hours at the office working on new technologies. They are busy, and they just bank their money-they are not even certain about how much they have. Bob says his accountant tells him that his company is worth $5,000,000. The accountant has repeatedly tried to talk Bob and Leah into developing a retirement plan for themselves and company employees, but they were always too busy to make the decision.
Bob and Leah have a three-year-old daughter, Leslie. During the day, Leah's 54-year-old mother, Sally, takes care of Leslie at their Ann Arbor, Michigan, home. Leah's 55-year-old dad, Russell, lives in Ann Arbor as well.
Bob and Leah are expecting their second child in about three months. It has been a troubled pregnancy. Prenatal testing and visits to numerous doctors established that their second daughter will have severe learning disabilities. They intend to have their baby and realized through this process that they have ignored their finances and estate planning needs for too long.
Bob's parents live in his hometown-Charlotte, North Carolina. They are both 67 years old and have health issues. Bob's brother, 26-year-old Steve, is a career student and lives in Ann Arbor, attending the University of Michigan. Steve adores Leslie. Bob's sister, Pam, is 40 and lives with her husband and their three children in Sacramento, California. Leah's sister, Lisa, is 29 years old, divorced, and raising three children on her own in Livonia, Michigan, a Detroit suburb. Bob and Leah recently purchased a new, much larger home and are making it accessible for a person who is disabled. Bob and Leah drive brand new hybrid cars because they appreciate the benefits cutting-edge energy technology offers.
Bob and Leah want to ensure that if anything happens to them, their children should be well taken care of. They want to start saving for Leslie's college education. She has shown signs of superior intelligence. They have high hopes that she will one day have a doctoral degree like her father and take over Flexible Materials Inc. They believe she should pay for graduate school as a good lesson in managing finances. They want a full financial plan and long-term planning relationship because they have considerable assets and no real knowledge of what to do with them. Bob and Leah also realize that there are many benefits to be had by starting a retirement plan for their company. They are also enjoying their workaholic lifestyle but realize that with a special needs child, Leah may have to cut back on her workload. They also do not want to keep working at the same pace for the rest of their lives. They would like to retire early without selling the company they built with their own hands. They both believe they should offer some kind of retirement plan to their employees. However, they also feel that the greater part of the money ought to go to their own retirement.
[Flexible Inc.'s Employees]
|
Employee
|
Age
|
Salary
|
Officer
|
Owner
|
|
Dr. Bob
|
35
|
$300,000
|
Yes
|
50%
|
|
Leah
|
32
|
$300,000
|
Yes
|
50%
|
|
Sixteen Eligible Employees
|
--
|
$400,000
|
No
|
--
|
Bob and Leah claim four exemptions on their W-9. Therefore, their monthly take-home pay after all withholdings is approximately $16,130 each.
[Statement of Financial Condition]
|
Assets
|
Liabilities
|
|
Cash (Joint Tenant) 1
|
$900,000
|
|
Credit Cards (Joint) 4
|
$5,000
|
|
|
|
Home Mortgage 5
|
$540,200
|
|
|
|
Car Loans 6
|
$30,000
_________
|
|
Investments
|
|
|
|
|
|
Flexible Materials
|
$5,000,000
|
|
|
|
|
IRA (Bob) 2
|
$35,000
|
|
|
|
|
IRA (Leah) 3
|
$21,000
|
|
|
|
|
_________
$5,056,000
|
|
|
|
|
|
|
|
|
|
Personal Property
|
|
|
|
|
|
New Home (Joint Tenant) 3
|
$679,000
|
|
|
|
|
Personal Property
|
$96,000
|
|
|
|
|
Autos
|
$80,000
|
|
|
|
|
_________
$855,000
|
|
|
|
|
Total Assets:
|
$5,911,000
|
|
Liabilities:
|
$575,200
|
1. They have the following assets: cash in checking = $4,000; savings = $60,000; and mutual funds (all stock) = $836,000. The savings are compounding quarterly at 5.25 percent, and mutual funds earnings are reinvested into the funds.
2. The first IRA was started while working at nuclear power plant.
3. Another IRA was started while working at University of Michigan.
4. The land they own is worth $100,000. Bank required insurance at 80 percent of mortgage value.
5. Bob and Leah are carrying a balance of $5,000 on their credit card on which they are paying an annual percentage rate (APR) of 21 percent. They have been too busy to think about the implications of such a high interest rate.
6. They have a 15-year mortgage on their new house at 6.5 percent interest rate. The monthly payment plus insurance and taxes equal $6,564.
7. Both cars have three-year notes at 8 percent interest. The payment plus insurance and taxes equal $1,252.
Additional Expenses
|
|
$300
|
per month
|
|
|
$250
|
per month
|
|
|
$320
|
per month
|
|
|
$100
|
per month
|
|
|
$200
|
per month
|
|
|
$1,000
|
per annum
|
|
|
$2,400
|
per annum
|
|
|
$800
|
per month
|
|
|
$85
|
per month
|
|
|
$8,400
|
per year
|
|
|
$1,500
|
per month
|
|
|
$600
|
per month
|
|
|
$1,600
|
per month
|
|
|
$800
|
per month
|
|
|
|
|
|
|
$10,000
|
per year
|
|
|
$5,000
|
per year
|
Additional Income
Investment Earnings
- Mutual Funds (Reinvested)
|
|
|
|
|
$16,720
|
per year
|
|
|
$25,280
|
per year
|
-
- Interest Income on Savings
|
$3,213
|
per year
|
[Personal Insurance]
Life
|
|
$300,000
|
|
|
Flexible Materials Inc.
|
|
|
Leah if living; if deceased, the living children of their marriage
|
|
|
$3,600 per year
|
|
|
|
|
$300,000
|
|
|
Flexible Materials Inc.
|
|
|
Bob if living; if deceased, the living children of their marriage
|
|
|
$2,400 per year
|
Automobile Insurance for Each Car
|
|
$500,000 single limit
|
|
|
$5,000/$15,000
|
|
|
$500,000 single limit
|
|
|
$250 deductible
|
|
|
$500 deductible
|
|
|
$3,600 per year for both cars
|
Bob and Leah's hybrid cars are expensive and not provided by Flexible Materials Inc. The company also does not reimburse expenses.
Homeowner's Insurance
|
|
HO-3 (Homeowner's policy-:the special form; Refer to pages 5-38 of your textbook for coverage.)
|
|
|
$465,000
|
|
|
$300,000
|
|
|
$500
|
|
|
$4,800
|
Business Insurance
Comprehensive Major Medical
|
|
All eligible employees of Flexible Materials
|
|
|
$250 per person per year
|
|
|
80/20 of next $5,000
|
|
|
$1,000,000
|
Note: Bob and Leah are covered by Flexible Materials Inc., and Leslie is covered as a dependent.
Group Life
|
|
All eligible employees
|
|
|
Two times the salary; maximum $300,000
|
|
|
Paid by Flexible Materials Inc.
|
Develop a comprehensive financial plan, taking into account:
- Risk management
- Tax planning
- Investments
- Retirement
- Estate planning