FPC008 Investment Advice - Case Study Assignment

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Assignment 1 Instructions

Case study 1

Spouses Rodney and Sarah Walker come to see you for assistance in their financial matters.

Rodney works as an operations manager for an insurance company earning $140,000 p.a. plus SG. Sarah is working part time as a medical assistant earning $35,000 p.a. plus SG.

They have a mortgage of $750,000 on their home and the current mortgage interest rate is 4.7% p.a. The repayments on the loan are currently $4,350 per month.

Their other living expenses are $80,000 p.a. This amount does not include mortgage repayments and tax liabilities.

They have no dependent children.

They have bank deposits in joint names of $100,000 earning no interest.

Rodney has a super account with AMP with a balance of $250,000 and Sarah has a super account with HESTA with a balance of $200,000.

Their home is currently worth $1,000,000 and their home contents is estimated at $90,000. Rodney has a car worth $50,000 and Sarah has a car worth $45,000.

They would like to consider strategy options to minimise tax and maximise retirement savings

Question 1   (17 marks | Word limit: 350 words)

  1. Prepare a balance sheet for the above (4 marks)
  2. Prepare a cashflow statement for the above (6 marks)
  3. What are seven (7) planning issues that you can identify from analysing the client’s balance sheet and cashflow? (7 marks)

Case study 2

Brett (aged 50) has the following investments:

Investments Details
Bank account $25,000
Term deposit $50,000; matures in 3 months
Term deposit $50,000; matures in 12 months
NAB shares 500 sharesShare price of $30 and dividend yield of 4.5% plus franking credits
ANZ shares 200 sharesShare price of $24 and dividend yield of 5.5% plus franking credits
Westpac shares 500 sharesShare price of $23 and dividend yield of 5% plus franking credits
CBA shares 100 sharesShare price of $100 and dividend yield of 3.6% plus franking credits
Managed fund $70,000invested in Vanguard Balanced Index
Superannuation fund $80,000invested in Vanguard Balanced Index

The above investments were products he selected himself from research and not from recommendations of a financial adviser.

Question 2   (15 marks | Word limit: 400 words)

  1. In considering Brett’s existing investments, does this provide a likely clue to his risk profile, and if so, what are four (4) indicators to his likely risk profile? (6 marks)
  2. In what ways could Brett’s age assist in establishing his risk profile? Compare the difference between Brett being aged 25 and being aged (4 marks)
  3. Brett would like to purchase a car for $50,000 in 3 months’ time and spend a further $50,000 for a holiday in 12 months. Brett does not want to use up all his term deposit funds when they mature. Provide at least two (2) options that could be considered as a viable funding alternatives? (5 marks)

Question 3   (17 marks | Word limit: 350 words)

Alfonse and Alice (both aged 65) would like to fully retire within the year.

Alfonse is currently earning $75,000 p.a. (plus SG) as a part-time consultant while Alice is earning $15,000

p.a. (plus SG) as a casual teaching assistant.

They are currently residing in an inner-city terrace that they own outright (valued at $2 million). They also have a holiday home worth $1.5 million which they would like to keep.

Their combined superannuation is $850,000. Based on their ‘moderate’ risk profile, you assume their superannuation can earn 5% p.a. net.

When asked about their income needs in retirement, they want to have a combined income of $65,000 p.a. In the discussion, you agree that 3% CPI p.a. should be applied.

Note: The life expectancy of Alfonse is 21 years (aged 85) and the life expectancy for Alice is 23 years (age 88).

  • If Alfonse and Alice stop work now, will their combined retirement funds last them until both reach their life expectancy? Provide a full cash flow forecast showing the cash movements each year to justify your The cash flow forecast should be in the following format:
Year Age Start super balance Investment return Estimated living expenses and investment withdrawal End super balance

(6 marks)

  • Respecting their wishes to keep their holiday home, discuss three (3) other trade-offs that could be considered to help improve their retirement (6 marks)
  • What are five (5) main general considerations you would consider when constructing a portfolio for the clients in their retirement. Justify each (5 marks)

Question 4   (26 marks | Word limit: 400 words)

Jason has a share portfolio of:

Argo $10,000
BHP $7,000
Woolworths $9,000
Wesfarmers $6,000
CBA $8,000

He has been doing some research on these stocks and has discovered the following information:

Forecast returns are:
Argo 6.0%
BHP 11.0%
Woolworths 4.0%
Wesfarmers 5.0%
CBA 4.5%

Risk free return in the market now is 2.75% and a market portfolio will return 9.5%. He also has a managed fund with an active manager who invests in Australian shares.

Over the past 12 months the returns of the fund, and comparison to its benchmark, is as follows:

Month Portfolio Return Benchmark
1 5% 1%
2 2% 2%
3 –7% –1%
4 3% –1%
5 –1% 3%
6 4% 1%
7 7% 2%
8 8% 3%
9 1% –3%
10 2% –4%
11 8% 3%
12 –2% 3%
  1. What is the expected return of Jason’s share portfolio? Show all (8 marks)
  2. What is the tracking error of Jason’s managed fund over the 12-month period? Show all (11 marks)
  3. What is the Beta of Jason’s share portfolio? What can you infer about the portfolio from this Beta? In your response, discuss how the portfolio will react when the market rises and then the market Note: For this question, refer to ‘Topic 2: Portfolio theory, Section 3: Capital asset pricing model’ and utilise the CAPM formula to solve for Beta. For this purpose, assume that the random error term is 0. (5 marks)
  4. Would you describe the returns of Jason’s managed funds as Alpha or Beta? Provide reasons for your (2 marks)

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