Question

their CTO uckle is as follows: $ 5,000 are relevant to the desire to buy a larger house? of of Sharon and Huckle is as foi 2. The most recent balance sheet of Sharo Liabilities and Net Worth Assets $1,000 Credit card balances Stock mutual funds (expected rate of return 12%) 15,000 300,000 15,000 9,000 6,000 5,000 Department store card Cash (21% interest) Visa Card (18% interest) Master Card (16% interest) House Car (personal use) Car loan (10% interest) Mortgage on homem 180.000 Net Worth SWO ??? Both of them work and their take-home pay is $40,000. Current are not saving any money (other than the "mandatory” savings such contributions). They can borrow money for investment purpose at 5% inte 000. Currently, they » savings such as CPP at 5% interest Required: (a) What is their net worth? (b) As their financial advisor, describe briefly four recommendations with respect to managing their debt, and three other personal financial planning recommendations to the family. (c) They have heard that there will be some savings if they "convert” all 1 their credit card debt into an investment loan. Calculate (i) the amount of interest savings annually and (ii) the amount of tax savings if their marginal tax rate is 30% and their average tax rate is 20%. 3. Jack and Natalie Novak, aged 32 and an

Answer 1

Ans (a) Net worth is the Value of your assets minus total of all Liabilities

Also Net worth is what is owned minus what is owed.

Income does not form part of Net worth.

Thus , Net worth will be Assets -Liabilities

=$331000-$205000

= $ 126000

Assets = Cash + Stock mutual fund + House+car

=1000+15000+300000+15000

= $331000

Liabilities= Credit card balances+car loan+Mortgage on Home loan

=(5000+9000+6000)+5000+180000

=$205000

Ans (b) Recommendations for managing debt:-

• Reduce the use of Credit cards as they have higher amt of interest levied on them.
• Borrow money at 5% for investment purpose and the spared money (that you kept aside for investment)you can use for your household expenses(departmental store expenses)
• Make the repayment of credit cards on time to avoid interest.
• Save some amount of your income which can be used for early foreclosure of car loan

Personal Financial planning Recommendation:-

• Increase the amount of Investment in Mutual fund as they give good returns i.e. 12 %
• Encourage more savings apart from Mandatory CPP deposits.
• Encourage investments in market Instruments yielding higher returns.

Ans (c) If Sharon and Huckle convert their credit card debt into investment loan following will be the implications:-

(i)The amount of Annual Interest saving.

Step I Interest on Credit cards:-

	Rate of Interest	Amount in $	Interest in $
Department Store card	21%	5000	1050
Visa card	18%	9000	1620
Master card	16%	6000	960
Total		20000	3630

Step II Interest on investment loan

20000*5%= $1000

Saving in interest=Step I - StepII

=$3630-$1000

= $2630

(ii) Amount of tax saving ( marginal tax rate)

= Saving in Interest * Marginal tax rate

= 2630*30%

= $789

Amount of tax saving ( Average tax rate)  

  = Saving in Interest * Average tax rate

= 2630*20%

= $ 526

Thus Sharon and Huckle will have Interest saving of $2630 together with $789 and $526 of marginal tax and average tax saving respectively if they convert their credit card debt into investment loan .