This is a team assignment. With your team:

1. Analyze the case using the case method structure.
2. Complete the case requirements identified on last page.
3. Create a slide presentation to present your recommendations to your clients. You will present this to the class as a group.
4. The written report must be double-spaced, 12 pt. Arial.
5. Submit the written report and the slide presentation file to your instructor through Brightspace by the due date. See the course schedule for details. See the rubrics for the marking criteria.

Scenario

It has been a few months since you last met with Bill and Joanne Smith. Early on a Monday morning in June 2022, you receive an email from Bill Smith:

Hey, Hope you are well. Joanne and I just wanted to thank you for helping us settle our investment options. Much appreciated! I received my pension statement confirming the changes we made to the investments in the plan. Joanne and I have been thinking about your question about when we want to retire and wed like to chat with you about creating a formal written financial plan. When can we meet? Oh, by the way, Im thinking about buying another consulting business Ive attached the details in an Excel spreadsheet.

The Smiths Current Situation

Bill Smith, age 40, is married to Joanne Smith, age 42. They have two children: Nick, age 17, and Sarah, age 15.

Mr. Smith is a professional engineer. He has 15 years of experience working at Cenovus Energy. He has a defined contribution plan and in 2022 he earned $130,000. As a highly skilled management employee Cenovus awarded Bill with a stock option plan. In 2022, he was granted employee stock options on Cenovus common stock as follows:

2022 GrantMarket Price at Date of Grant$18Date of Grant June 1 2022Strike Price$15Expiry DateAug. 1 2023Option Premium$0.00Shares Granted500

Joanne Smith trained as a Human Resources Specialist. She has worked for Enbridge Inc. (ENB) for the past 10 years. She currently earns $90,000 annually and has a defined benefit pension plan. Her anticipated pension benefit is 2% of her final 3 years average salary.

Bill and Joanne expect to work for another 20-25 years, retiring in their early sixties.

Not unlike many other Canadian families, the Smiths primary goal is to pay off the mortgage on both their home and a vacation property that they own. In addition, they would like to pay for their childrens post-secondary education.

Nick, age 17, has decided he would like to attend the University of Calgarys School of Engineering, following in his fathers footsteps; he starts university next year. Sarah, age 15, wants to study architecture at the University of Alberta. The Smiths anticipate that Nick and Sarahs education will cost approximately a total of $120,000 ($60,000 each in current dollars) each, as both programs are 4-year Bachelors programs.

The Smiths have not begun saving for their childrens education. However, Joannes mother, who passed away last year, set aside $10,000 in a testamentary trust for Nick and Sarahs education.

Recent Changes in their Investment Allocation

Since your meeting with the Smiths a few weeks ago, a number of changes to their investments have been implemented including changing their KYC to reflect a balanced-growth asset mix (refer to attached exhibits). This involved the re-allocation of investments including taking some gains off the table; offset of course by some capital losses. The net result is that you have projected that the Smiths will owe taxes on approximately $15,000 in capital gains income when they file their 2023 tax return.

Smith and Associates (Bills Consulting Practice)

Bill, loves his work as an engineer so much that 11 years ago he opened a consulting practice of his own Smith and Associates, Inc. The business with its specialization in electrical engineering has boomed. In 2022, net earnings were $33,600. The book value of Bills equity as of the year ended 2022 is $348,600. Bill has never taken any income or dividends from the business, which has resulted in a dramatic growth in his equity. The firm employs three engineers on an as-needed contract basis.

Recently, Bill had lunch with Bernie Jones, a professional engineer and owner of Blackrock Petroleum Consulting, which occupies the office space across the hall from Bills existing practice. Bernie would like to retire to the country and has proposed that Bill purchase Blackrock for $310,000.

In Bernies words:

Bill Im giving you a good deal; $310,000 is about a 10% discount from the projected fees that the company will charge in 2023 and 2024. I believe that fees will rise by 10% in 2023, 8% in 2024, and by 6% annually in 2025 and beyond.

Bill thinks this could be a great opportunity to expand the business while still working at Cenovus. However, he has his concerns about the price that Bernie has proposed. In the Excel spreadsheet he attached to his email, he left the following comments:

• Not sure of the price? A normal rate of return on these types of firms is 20% and 25%.
  • What is the risk level in buying this business economy is not in great shape?
  • The higher the risk the higher the returnisnt that what you said when we chatted?
  • Can you give me a range of price for this type of business?
• Costs seem high?
  • We could reduce rent costs by moving some of Bernies employees into my existing office.
  • Potential rental savings $15,000 per year given what Blackrock current pays.
• The Globe and Mail is predicting a 3% rise in salaries per year and a 5% rise in travel costs due to higher oil and gas prices.

Based on the most recent bank account and investment account statements provided by the Smiths during your initial meeting, you were able to create a balance sheet for the Smith household as of December 31, 2022 (given at end).

At the time of your last meeting with the Smiths you also made the following notes:

• The Smiths appear to have a sound personal balance sheet.
• They want to retire in their early 60s (62-65); is this feasible?
• $10,000 in Maximus 1 year GIC matured in December 2022.
  • Testamentary trust for Nick (17) and Sarah (15).
  • Invested at 3% per annum.
  • How will they pay for the kids education?
• Mortgage on principal residence is due for renewal in 6-7 months.
  • Prices expected to decline up to 20% over next 2-3 years; home currently valued at $750,000.
  • Smiths concerned about impact of rising mortgages rates.
  • Should they renew mortgage for 7- or 10-year term or go short-term?
  • Will this affect their ability to retire in their early 60s?
• Joanne has maxed out her TFSA contributions.
• Bills most recent NOA states unused RRSP room of $124,000.
• Joannes most recent NOA states unused RRSP room of $10,000.

Bill and Joanne are very pleased that they took the advice of their friends and family to engage you are their financial planner. They enjoy life and have taken great pleasure from watching their children grow into young adulthood. However, of late, and perhaps given the poor state of the economy, they have begun harbouring doubts about whether they can retire in the comfort they once hoped.

As Joanne put it to you recently: We both work very hard but it seems were always just a couple of steps behind where we should be! We enjoy life, and hope to retire in our early 60s, but Im just not sure if we can? The bills, paying off mortgages and saving for the kids education are just some of thing things that always seem to get kicked to the back burner!

Bill agreed, stating, Yeah, the bills just seem to keep getting bigger every month!

Bill and Joanne Smith Household Balance Sheet December 31,2022 Exhibit 1Liquid Assets Short-Term Liabilities Chequing Account$3,000Vision Plastic Flymiles Credit$15,000Emergency Savings21,832

Card (2)

BIG Bank Line of Credit (3)

$41,000Total Liquid Assets$24,832Total Current Liabilities$56,000 Long-Term Liabilities Long Term Assets Mortgage Principal Residence$333,459RRSP Bill$145,099Mortgage Vacation261,658TFSA Joanne58,880Total Long-Term Liabilities$595,117Investment Account Joanne30,250 Defined Con. Pension Bill67,542Total Liabilities $651,117Investment Account Bill56,881 Smith & Associates Bills Equity358,600 Household Goods 30,000 Principal Residence750,000 Vacation Home

400,000

Total Long-Term Assets (1)$1,922,085 Household Net Worth$1,270,968

Note(s):

1. Excludes account ( $10,000) for Nick and Sarah. Cash matured in Dec. 2022.

2. 30% of balance above is related to Bills business & is expensed on a monthly basis.

3. Credit limit on line of credit $60,000, 8.5% annual interest rate, min. payment taken 15^th of each month (refer to household cash flow statement).

Required

1. Identify all implicit and explicit problems and issues that the Smiths are facing.
2. Assess a minimum of two potential solutions to each of the problems/issues they face (both a qualitative and quantitative analysis should be completed for each potential solution).
3. Create a financial plan (recommendations and implementation) that in your best judgement, given the case facts and any research you complete, will best help the Smiths effectively deal with the problems and challenges they face in achieving their retirement goals.

Projected Financial Benchmarks

• Long-run inflation rate 3% per year.

Long-Run (15 year) Returns on Investment by Asset Class

Large Cap. Funds7.20%Balanced Funds5.60%Fixed Income (Bond) Funds5.90%3 month Canadian T-Bill2.60%Dividend Funds8.50%U.S. Equity Funds2.40%

Source: http://business.financialpost.com/personal-finance/retirement/rrsp/15-year-mutual-fund-review

Mortgage Renewal Rates

BIG Bank and Trust Mortgage RatesTermVariable12345710Rate5.01%3.98%4.22%4.29%4.33%4.49%7.04%8.00%

Failure to follow the case method and structure will result in a deduction of 20% of your final assessed grade. Refer to the grading rubric for assessment weightings and factors used in assessing case submissions.