Personal Financial Planning 11th Edition Lawrence J. Gitman, Michael D. Joehnk - Solutions

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7. Comment on the estate shrinkage experienced for Philip’s estate. What might have been done to reduce this shrinkage? Explain.
6. Subtract the appropriate unified tax credit (Exhibit 15.8) for 2007 from the tentative tax on estate tax base to arrive at the federal estate tax due. Note that there is no credit for gift tax payable on post-1976 gifts because no gift taxes had to be paid.
5. Use Exhibit 15.7 to determine the tentative tax on estate tax base.
4. Calculate the estate tax base, taking into account the gifts given to Mark and Alice (remember the annual exclusions).
3. Determine the total allowable deductions.
2. Compute the value of Philip’s gross estate at the time of his death.
1. Compute the value of Philip’s probate estate.
5. What duties will Leonard Wiseman and Plato Jones have to perform as coexecutors of Theo’s estate?
4. What options are available to Theo if he decides later to change or revoke the will? Is it more difficult to change a living trust?
3. Is a living trust an appropriate part of his estate plan? How would a living trust change the nature of Theo’s will?
2. Explain to Theo the common features that need to be incorporated into a will.
1. Does Theo really need a will? Explain why or why not. What would happen to his estate if he were to die without a will?
7. Summarize any recent legislation affecting estate taxes, and briefly describe its impact on estate planning. Explain why getting rid of the estate tax doesn’t eliminate the need for estate planning.
6. Use Worksheet 15.2. When Jim Levitt died in 2007, he left an estate valued at $3,650,000, as follows: $10,000 to the local hospital, $60,000 to his alma mater, and the remainder to his three adult children. Death-related costs and expenses were $6,800 for funeral expenses, $40,000 paid to
5. Joe Phillips, 48 and a widower, and Amy Parsons, 44 and divorced, were married 5 years ago. Joe has two children, and Amy has one (from their prior marriages). Their estate totals $1.4 million, including a house valued at $475,000, a vacation home in the mountains, investments, antique furniture
4. Your best friend has asked you to be executor of his estate. What qualifications do you need, and would you accept the responsibility?
3. Prepare a basic will for yourself, using the guidelines presented in the text; also prepare your brief letter of last instructions.
2. Renée and Steve Burrows are in their mid-thirties and have two children, ages 8 and 5.They have combined annual income of $95,000 and own a house in joint tenancy with a market value of $310,000, on which they have a mortgage of $250,000. Steve has $100,000 in group term life insurance and an
1. Generate a list of estate planning objectives that apply to your personal family situation.Be sure to consider the size of your potential estate as well as people planning and asset planning.
4. What would you advise Lydia about her ability to retire in 8 years, as she hopes to?
3. Lydia’s employer matches her 401(k) contributions dollar for dollar, up to a maximum of $3,000 a year. If she continues to put $3,000 a year into that program, how much more will she have in 8 years, given a 9 percent rate of return?
2. Given she can invest the money market securities, stocks, and bonds (the $72,600) at 5 percent after taxes, and the amount she’s now accumulated in her tax-sheltered IRA and 401(k)—the$47,400—at 9 percent, how much will Lydia’s investment assets be worth in 8 years, when she retires?
1. After taking into account the income Lydia will receive from Social Security and her companysponsored pension plan, the financial planner has estimated that her investment assets will need to provide her with about $15,000 a year to meet the balance of her retirement income needs. Assuming a 6
4. What role, if any, could annuities play in these retirement programs? Discuss the pros and cons of using annuities as a part of retirement planning.
3. Explain how you would use each of these plans in developing your own retirement program.
2. Which plan do you think is more desirable? Consider the features, retirement age, and benefit computations as just explained. Which plan do you think could be subject to a conversion to a cash-balance plan sometime in the future? Explain. Include in your answer the implications for the
1. Discuss the features of the retirement plans offered by United Foods Corp. and U.S. Steel and Castings.
7. Would you want a voluntary supplemental plan as part of your program? If you could have only one supplemental plan, what would it be?
6. Would the plan be qualified?
5. Would your plan be a defined contribution or a defined benefit plan? You could also have a combination of the two types.
4. What would be the earliest retirement age? Would there be provisions for early retirement?
3. What would be the eligibility and vesting provisions? Would your plan be portable? Under what conditions?
2. Stated as a percentage of your base salary, how much would be put into your retirement plan each year? Remember that there are certain allowable limits.
1. Would the plan be contributory or noncontributory?
16. What are the main differences between fixed-rate and variable annuities? Which type is more appropriate for someone who is 60 years old and close to retirement?
15. Use Worksheet 14.1 to assist Linda Bailey with her retirement planning needs. She plans to retire in 15 years, and her current household expenditures run about $50,000 per year.Linda estimates that she’ll spend 80 percent of that amount in retirement. Her Social Security benefit is estimated
14. Use Exhibit 14.3 to determine the annual Social Security benefit for Chester Atherton, assuming that he has an “average” career earnings level. Chester is 65 years old and earns $18,000 a year at a part-time job. (Note that Chester is already at “full retirement age,” since he was born
13. Briefly describe the main characteristics of defined contribution and defined benefits pension plans, and discuss how they differ from cash-balance plans. In each of these plans, does the employee or employer bear the risk of poor investment performance?
12. Why is it important to check an insurance company’s financial ratings when buying an annuity? Why should you look at past performance when considering the purchase of a variable annuity?
11. Briefly explain why annuities are a type of tax-sheltered investment. Do you have to give up anything to obtain this tax-favored treatment? (Hint: Age 591/2)
10. Explain how buying a variable annuity is much like investing in a mutual fund. Do you, as a buyer, have any control over the amount of investment risk to which you’re exposed in a variable annuity contract? Explain.
9. Dave Jones is in his early thirties and is thinking about opening an IRA; however, he can’t decide whether to open a traditional/deductible IRA or a Roth IRA, so he turns to you for help.a. To support your explanation, you decide to run some comparative numbers on the two types of accounts;
8. Describe the three basic types of IRAs (traditional, Roth, and nondeductible), including their respective tax features and what it takes to qualify for each. Which is most appealing to you personally? Explain.
7. At what age would you like to retire? What type of lifestyle do you envision (for example, where do you want to live, do you want to work part-time, and so on)? Discuss the steps you think you should take to realize this goal.
6. John Yee is an operations manager for a large manufacturer. He earned $68,500 in 2006 and plans to contribute the maximum allowed to the firm’s 401(k) plan. Assuming that John is in the 28 percent tax bracket, calculate his taxable income and the amount of his tax savings. How much did it
5. Diane Fein has just graduated from college and is considering job offers from two companies.Although the salary and insurance benefits are similar, the retirement programs are not. One firm offers a 401(k) plan that matches employee contributions with $.25 for every$1 contributed by the
4. Use Exhibit 14.3 to determine the amount of Social Security retirement benefits that Elwood Cheeseater would receive annually if he had a high (that is, “maximum”) level of career earnings, is age 62, has a dependent wife (also age 62), and has a part-time job that pays him $24,000 a year.
3. Many critics of the Social Security program feel that participants are getting a substandard investment return on their money. Discuss why you agree or disagree with this viewpoint.
2. Use Worksheet 14.1 to help Al and Linda Gonzales, who’d like to retire while they’re still relatively young—in about 20 years. Both have promising careers, and both make good money. As a result, they’re willing to put aside whatever is necessary to achieve a comfortable lifestyle in
1. DeShawn Thomas, a 25-year-old personal loan officer at First State Bank, understands the importance of starting early when it comes to saving for retirement. She has designated$3,000 per year for her retirement fund and assumes she’ll retire at age 65.a. How much will she have if she invests
4. Do you think some type of real estate investment would make sense for Marge, and if so, what type would you suggest? Which would make more sense for Marge: flipping homes or a REIT?Explain.
3. What type of mutual fund investment program would you set up for Marge? In your answer, discuss the types of funds you’d consider, the investment objectives you’d set, and any investment services (such as withdrawal plans) you’d seek. Would taxes be an important consideration in your
2. Do you think she should use her $15,000 savings to start off a mutual fund investment program?
1. In view of Marge’s long-term investment goals, do you think mutual funds are an appropriate investment vehicle for her?
4. What recommendations would you make regarding Dave’s dilemma about whether to go into stocks or mutual funds? Explain.
3. What types of mutual funds would you recommend to Dave?
2. What special fund features might help Dave achieve his investment objectives?
1. Explain to Dave the key reasons for purchasing mutual fund shares.
14. Using Yahoo! Finance, or another investor information portal, find three real-estate-related stocks. Evaluate them as potential additions to your portfolio. Do you think they provide the same degree of diversification as other forms of real estate investments? Explain.
13. Using the Find a REIT section of the Invest in REITs site, http://www.investinreits.com/findaREIT/findareit.cfm, select two publicly traded real estate investment trusts in different property categories. Using information you can find on the REIT’s Web site and other Internet sites, prepare a
12. Pam Flores is thinking about investing in some residential income-producing property, which she can purchase for $200,000. Pam can either pay cash for the full amount of the property or put up $50,000 of her own money and borrow the remaining $150,000 at 8 percent interest. The property is
11. Assume that you’ve just inherited $ 100,000 and wish to use all or part of it to make a real estate investment.a. Would you invest directly in real estate, or indirectly through something like a REIT?Explain.b. Assuming that you decided to invest directly, would you invest in income-producing
10. Net asset value, end of period: $64.84 $58.60 Use this information to find the rate of return earned on the East Coast G-&-I fund in 2006 and in 2007. What is your assessment of the investment performance of this fund for the 2006–2007 period?
9. Total distributions ( 3.25) ( 5.06)
8. Distributions from realized gains ( 2.42) ( 3.82)
7. Dividends from net investment income ( $ .83) ( $1.24)
6. Less distributions:
5. Total from investment operations 9.49 10.74
4. Net gains on securities (realized and unrealized) 8.10 9.39
3. Net investment income $1.39 $1.35
2. Income from investment operations:
1. Net asset value, beginning of period: $58.60 $52.92
10. Here is the per-share performance record of the East Coast Growth-and-Income fund for 2007 and 2006:2007 2006
9. A year ago, the Full-Bore Growth Fund was being quoted at an NAV of $21.50 and an offer price of $23.35; today it’s being quoted at $23.04 (NAV) and $25.04 (offer). Use the approximate yield formula, or a handheld financial calculator, to find the rate of return on this load fund; it was
8. Describe an ETF and explain how these funds combine the characteristics of open- and closed-end funds. Looking in the Vanguard family of funds, which of their funds would most closely resemble a “Spider” (SPDR)? In what respects are the Vanguard fund (that you selected) and Spiders the same;
7. About a year ago, Dave Kidwell bought some shares in the Hi-Flyer Mutual Fund. He bought the stock at $24.50 a share, and it now trades at $26.00. Last year the fund paid dividends of 40 cents a share and had capital gains distributions of $1.83 a share. Using the approximate yield formula, what
6. Using a source like Barron’s, Forbes, Money, or Morningstar, along with any of the online sites, select five mutual funds—(a) a growth fund, (b) an index fund, (c) a sector fund, (d)an international fund, and (e) a high-yield corporate bond fund—that you feel would make good investments.
5. What investor service is most closely linked to the notion of a fund family? If a fund is not part of a family of mutual funds, can it still offer a full range of investor services? Explain.Using a source such as The Wall Street Journal, or perhaps your local newspaper, find two examples of fund
4. For each pair of funds listed here, select the fund that would be the least risky; briefly explain your answer:a. Growth versus growth-and-incomeb. Equity-income versus high-grade corporate bondsc. Intermediate-term bonds versus high-yield municipalsd. International versus balanced
3. Imagine that you’ve just inherited $20,000 from a rich uncle. Now you’re faced with the problem of deciding how to spend it. You could make a down payment on a condo—or better yet, on that Corvette that you’ve always wanted. Or, you could spend your windfall more profitably by building a
2. Using the mutual fund quotes in Exhibit 13.3, and assuming that you can buy these funds at their quoted net asset values, how much would you have to pay to buy each of the following funds?a. Diversified Equity Growth Fund (EqGrow)b. Domini Social Equity Fund (Soc Equity)c. Dodge & Cox
1. Contrast mutual fund ownership with direct investment in stocks and bonds. Assume that your class is going to debate the merits of investing through mutual funds versus investing directly in stocks and bonds. Develop some pro and con arguments for this debate, and be prepared to discuss them in
4. What recommendation would you make to Kathy regarding to her available investment alternatives?Explain.
3. Discuss the factors you would consider when analyzing these alternate investment vehicles.
2. What chance does she have of earning a satisfactory return on her investments if she invests her $15,000 in (a) blue-chip stocks, (b) growth stocks, (c) speculative stocks, (d) corporate bonds, or (e) municipal bonds?
1. What investment options are open to Kathy?
17. Using the resources available at your campus or public library, work the following problems.(Note: Show your work for all your calculations.)a. Select any two common stocks, and determine the dividend yield, earnings per share, and P/E ratio for each.b. Select any two bonds, and determine the
16. A certain 6 percent convertible bond (maturing in 20 years) is convertible into 20 shares of the company’s common stock. The bond has a par value of $1,000 and is currently trading at $800; the stock (which pays a dividend of 75 cents a share) is currently trading in the market at $35 a
15. Find the conversion value of a convertible bond that carries a conversion ratio of 24, given that the market price of the underlying common stock is $55 a share. Would there be any conversion premium if the convertible bond had a market price of $1,500? If so, how much?
14. Assume that an investor pays $850 for a long-term bond that carries a 71/2 percent coupon.During the next 12 months, interest rates drop sharply, and the investor sells the bond at a price of $962.50.a. Find the current yield that existed on this bond at the beginning of the year. What was it
13. A 25-year, zero coupon bond was recently quoted at 12.500. Find the current yield and yield to maturity of this issue, given the bond has a par value of $1,000. (Assume annual compounding for the yield-to-maturity measure.)
12. Find the current yield of a 10 percent, 25-year bond that’s currently priced in the market at$1,250. Now, use a financial calculator to find the yield to maturity on this bond (use annual compounding). What’s the current yield and yield to maturity on this bond given that it trades at
11. Which of these three bonds offers the highest current yield? Which one has the highest yield to maturity?a. A 9.5 percent, 20-year bond quoted at 97.750b. A 16 percent, 15-year bond quoted at 164.625c. A 5.25 percent, 18-year bond quoted at 54.000
10. Describe and differentiate between a bond’s (a) current yield and (b) yield to maturity. Why are these yield measures important to the bond investor? Find the yield to maturity of a 20-year, 9 percent, $1,000 par value bond trading at a price of $850. What’s the current yield on this bond?
9. An investor in the 28 percent tax bracket is trying to decide which of two bonds to select:one is a 6.5 percent U.S. Treasury bond selling at par; the other is a municipal bond with a 5.25 percent coupon, which is also selling at par. Which of these two bonds should the investor select? Why?
8. The price of Consolidated Everything is now $65. The company pays no dividends. Mr. M.Bags expects the price 4 years from now to be $105 a share. Should Mr. B. buy Consolidated E. if he desires a 15 percent rate of return? Explain.
7. The Med Online Co. recently reported net profits after taxes of $15.8 million. It has 2.5 million shares of common stock outstanding and pays preferred dividends of $1 million a year. The company’s stock currently trades at $60 per share.a. Compute the stock’s earnings per share (EPS).b.
6. A company has total assets of $2.5 million, total liabilities of $1.8 million, and $200,000 worth of 8 percent preferred stock outstanding. What is the firm’s total book value? What would its book value per share be if the firm had 50,000 shares of common stock outstanding?
5. An investor is thinking about buying some shares of FinComm-I at $60 a share. She expects the price of the stock to rise to $100 a share over the next 3 years. During that time, she also expects to receive annual dividends of $3 per share. Given that the investor’s expectations (about the
4. This is an Online Investing question that requires access to the Internet. Once you’re online, go to the BetterInvesting Web site at http://www.betterinvesting.org, click on the “Stocks” tab from the menu along the top, and then select “Software/Worksheets.” Under the list of

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Personal Financial Planning 11th Edition Lawrence J. Gitman, Michael D. Joehnk - Solutions

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