FINA 385 Lecture Notes - Lecture 7: Refinancing, Porton, Ender Wiggin

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28 Jun 2016

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In the first phase of the home-buying process, you should consider the benefits and drawbacks of this major financial commitment. Also, evaluate different types of housing units and forms of ownership, and determine the amount you can afford. The rrsp home buyers" plan requires minimum annual payments of 1/15th of the borrowed funds until the full amount is repaid to your rrsp. If a payment is missed, it must be included as taxable income. In times of high demand for housing, negotiating may be minimized; this situation is referred to as a seller"s market, since the current homeowner is likely to have several offers for the property. In such a situation, the final sales price may even exceed the seller"s original asking price. In contrast, when home sales are slow, a buyer"s market exists and a lower price is likely. The amortization period is the period chosen by the borrower to repay the entire loan.

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Anna DeCile, 49, is feeling the financial fallout from a divorce. Her lifestyle has dramatically changed with the loss of her husband's income and she fears retirement looming on the horizon. She plans to work until age 70 in order to play catch-up. Then she wants to move south to a cheaper location in Virginia or the Carolinas to retire.

DeCile earns $29, 573 ($2, 479 monthly) and noted that she has two adult children. She also noted that a long-term goal was "someone to care for me when I am unable to care for myself," but the specifics were unclear. Other financial goals in the short and intermediate term are a $1,800 cruise, $2,000 of home improvements, pre-paid funeral expenses, and "money to live on $3,500 per month."

Another concern is health insurance. After her divorce, DeCile felt that she could not afford to pay her ex-husband's employer over $5,000 annually for coverage. She lives in fear of a major illness or disease (e.g., cancer) because her current employer does not provide health benefits.

DeCile has been gradually spending money received from her divorce settlement to make ends meet. The simple fact is that she can't afford her lifestyle and her savings is running out. She estimates that there is at least a $500 per month gap between what she earns and what she spends. No specific monthly expense figures were provided, but she listed car insurance as a major concern.

Asset and debt figures were listed, however. DeCile's net worth is $121, 293. Her major asset is her $145,000 home. She also has $206 in checking, $1,960 in savings, $5,786 in two bank CDs, a $2,625 money market fund, $4,602 in mutual funds, $3,514 in stocks, and $20,000 of personal property.

On the debt side, DeCile owes $56, 032 on her home, a $28,759 mortgage and a $27, 273 home equity loan. Other debts are a $4,611 personal loan and $1,760 owed to a friend. DeCile is concerned that her debt load has been rising. Her house needed a number of repairs, which resulted in the home equity loan.

DeCile has no will to indicate her estate planning wishes. "I don't have enough to worry about, she notes. She has a $20,000 whole life policy that could pay funeral costs and $300,000 of liability coverage on her car. She has no earmarked retirement savings such as a 401(k) or IRA.

1.Discuss the strengths and weaknesses of DeCile's financial situation.

2.Discuss the strengths and weaknesses of DeCile's financial situation.

3.Comments about DeCile's cash flow.

4.Calculate the savings required to reach DeCile's financial goals.

5.Recommend 3 to 5 action steps to improve DeCile's financial

6. Recommended financial products such as bank accounts, insurance policies, and mutual funds for DeCile.

7.List the available resources that can assist DeCile'sto improve her finances.

1. What would a renterâs insurance policy cover in case of a fire? (Points : 2)

Damages to your neighbor's personal property
Any damages to the building structure
Temporary living expenses, like hotel
Your monthly paycheck

Question 2.2. The insurance designed to help with nursing home or in-home care due to chronic illness is called: (Points : 2)

Medicare
Major medical
Comprehensive major medical
Nursing home care
Long-term care

Question 3.3. A liability suit could result when: (Points : 2)

Lightning strikes your home
Your son falls down the stairs of your home
Your automobile is stolen
Your dog bites the neighbor
Smoke from the fireplace fills your house

Question 4.4. What approach, would determine the amount of life insurance for your family to maintain its current lifestyle and funds after your death? (Points : 2)

Earnings multiple approach
Needs approach
Cash liquidity approach
Funds analysis approach

Question 5.5. The basic purpose of insurance is: (Points : 2)

Protect your health
Protect you from the risk of loss
Supplement your income
Help you from making bad decisions

Question 6.6. Basic health-care benefits cover: (Points : 2)

Hospital expenses only
Hospital and surgical expenses
Hospital, and surgical and physician expenses
There is no basic health-care insurance

Question 7.7. For auto insurance, property coverage pays for: (Points : 2)

Your legal responsibility to others for bodily injury
The cost of treating injuries, rehabilitation, lost wages, and funeral costs
Damage or theft of your car
All of the above

Question 8.8. Life insurance policy designates a primary person who is intended to be provided for. Who is this person? (Points : 2)

beneficiary
contingent beneficiary
policyholder
insured

Question 9.9. Which statement accurately describes term life insurance? (Points : 2)

Provides no investment features
Costs more than other types of life insurance
Has premiums that decrease over one's lifetime
Pays benefits to the insured when the insured reaches age 65

Question 10.10. What is the primary purpose of buying life insurance? (Points : 2)

as a tax shelter
to provide protection from financial losses
as an investment
to cover personal property

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You must read the case below (Financing Tuxedo Airâs Expansion Plans with a Bond Issue) carefully. Various assigned readings in this course lean toward value investing. Concepts related to financial statements and long-term financial planning (chapter 3) and valuation and future cash flows (chapter 7) will help you analyze the cases. Preparing the Case Analysis Step 1. Define the problem (15% of assignment grade) Be sure to identify the problem and not the symptom of a problem. For example, a decline in sales is a symptom of a problem; you must identify the actual cause of the decline in sales.

Step 2. Formulate alternative solutions to the problem (20% of assignment grade) It may be helpful to brainstorm as many solutions as you can and then narrow your list down to three or four solutions you feel are the strongest.

Step 3. Evaluate and compare the alternative solutions (35% of assignment grade) To evaluate alternative solutions you should consider their strengths (e.g., increased productivity) and their weaknesses (e.g., increased cost).

Step 4. Recommend and justify an effective solution (30% of assignment grade) Be sure to record the reasons why the chosen solution is most effective. In your analysis you must provide a recommendation that is supported by your analysis. Note: Your analysis may require that you identify more than one problem and develop a set of recommendations.

THE MINI CASE

Financing Tuxedo Airâs Expansion Plans with a Bond Issue

Mark Taylor and Jack Rodwell, the owners of Tuxedo Air, have decided to expand their operations. They instructed their newly hired financial analyst, Ed Cowan, to enlist an underwriter to help sell $35 million in new 10-year bonds to finance construction. Chris has entered into discussions with Suzanne Lenglen, an underwriter from the firm of Raines and Warren, about which bond features Tuxedo Air should consider and what coupon rate the issue will likely have. Although Ed is aware of the bond features, he is uncertain about the costs and benefits of some features, so he isnât sure how each feature would affect the coupon rate of the bond issue. You are Suzanneâs assistant, and she has asked you to prepare a memo to Ed describing the effect of each of the following bond features on the coupon rate of the bond. She would also like you to list any advantages or disadvantages of each feature:

1. The security of the bondâthat is, whether the bond has collateral.

2. The seniority of the bond.

3. The presence of a sinking fund.

4. A call provision with specified call dates and call prices.

5. A deferred call accompanying the call provision.

6. A Canada plus call provision.

7. Any positive covenants. Also, discuss several possible positive covenants Tuxedo Air might consider.

8. Any negative covenants. Also, discuss several possible negative covenants Tuxedo Air might consider.

9. A conversion feature (note that Tuxedo Air is not a publicly traded company).

10. A floating-rate coupon.

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FINA 385 Lecture Notes - Lecture 7: Refinancing, Porton, Ender Wiggin

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