You are the financial advisor for Mary Killington. She has come to you seeking financial advice based on her current financial situation. She has a few financial goals that she would like to achieve and is needing some understanding and direction. As her financial advisor, it is your responsibility to give her proper financial advice and in order to do so, you will need to understand her current net worth, budget, tax situation, and investment goals. Using the information below, please answer the questions. Be sure to answer each question in full. If you think that any information is missing, do not hesitate to contact me.
Financial Details for Mary Killington
Chequing Account Balance - $975 | Savings Account Balance - $6,750 |
Market Value of Home - $315,000 | Market Value of Automobiles - $27,000 |
Personal Possessions - $10,500 | Non-registered GICs - $13,500 |
TFSA mutual funds - $4,500 | |
Credit Card Balance - $10,000 | |
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Income deductions - $1,800 | |
Mortgage Payment - $1,300 | Property Tax Payment - $215 |
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Student Loan Payment - $150 | |
1. Complete a balance sheet for Mary and answer the questions below. Be sure to separate the assets and liabilities into their property category in her balance sheet. For example, separate current from long term liabilities. (15 marks)
a. Balance Sheet
b. What is Marys net worth?
c. Calculate Marys Current Ratio. Explain to Mary why her Current Ratio might be a concern.
2. Complete a monthly cash flow statement for Mary and answer the questions below. Be sure to separate the different forms of income and expenses into their property categories in her cash flow statement. For example, separate fixed and variable expenses. (15 marks)
a. Cash Flow Statement
b. What is Marys cash surplus or deficit?
c. Calculate Marys Debt Payments Ratio. Explain to Mary why her Debt Payments Ratio might be a concern.
3. Mary tells you the following three goals that she would like to achieve. Please restate each of the goals as SMART Goals. Be sure that the SMART Goals make sense for Marys financial situation. (6 marks)
a. I would like to buy a bigger house in a few years
b. I would like to pay off my car loan as soon as possible
c. I would like to save for retirement
4. Calculate Marys Marginal Tax Rate, total taxes owing on taxable income, and Average Tax Rate and answer thefollowing questions. Assume she has no tax deductions for the year. (10 marks)
a. Marginal Tax Rate
b. Total Taxes Owing based on Taxable Income
c. Average Tax Rate
d. Explain to Mary how she could lower her tax penalty with an RSP contribution of $10,000 this year. Be sure to show your calculations.
e. Explain to Mary the tax penalty of an RSP at the time of withdrawal.
f. Explain to Mary the tax benefits for investing in a TFSA as well as how much contribution room she would have remaining if she invested $12,000 in a TFSA this year (assume she is 35 years old and earned $500 in her TFSA).
5. Mary tells you that you would like to invest some money. For the investment, she is deciding between $1,200 for the next twenty-five months or $150 per month for the next twenty months. Assuming the investment will earn 6% during that time, which option will make her more money. Be sure to show your calculations for each option. (5 marks)
6. Mary tells you that she would like to have $1,500,000 saved in 30 years when she retires. Assuming she starts investing with a new retirement account with a $0 balanceand that she will earn an average of 8%, how much does she need to invest today to reach her goal? (2 marks)
7. Mary does not understand the difference between simple and compound interest. Using the balance in her savings account, calculate the simple interest and compound interest differences after 5 years if her savings account paid 3% interest. Assume interest compounds annually. (4 marks)
8. Mary is concerned about the increased cost of living. If inflation today is 7%, how long will it take for the cost of living to double? What financial advice can you give her to ensure that she is not as impacted by the increased cost of living? (3 marks)
