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Ken and Maureen Blake have two children, with ages of 6 years and 5 months. Their younger child, Don, was born with a congenital heart defect that will require several major surgeries in the next few years to correct fully. Ken is employed as a salesperson for a major pharmaceutical firm, and Maureen is a stay-at-home mother. Ken’s employer offers employees a choice between two health benefit plans:
• An indemnity plan that allows the Blakes to choose health services from a wide range of doctors and hospitals. The plan pays 80 percent of all medical costs, and the Blakes are responsible for the other 20 percent. There’s a deductible of $500 per person. Ken’s employer will pay 100 percent of the cost of this plan for Ken, but the Blakes will be responsible for paying $380 a month to cover Maureen and the children under this plan.
• A group HMO. If the Blakes choose this plan, the company still pays 100 percent of the plan’s cost for Ken, but insurance for Maureen and the children will cost $295 a month. They’ll also have to make a $20 co-payment for any doctor’s office visits and prescription drugs. They will be restricted to using the HMO’s doctors and hospital for medical services. Which plan would you recommend that the Blakes choose? Why? What other health coverage options should the Blakes consider?

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Casey Durgan
Casey DurganLv2
29 Sep 2019

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Ronald Roth started his new job as controller with Aerosystems today. Carole, the employee benefits clerk, gave Ronald a packet that contains information on the company’s health insurance options. Aerosystems offers its employees the choice between a private insurance company plan (Blue Cross/Blue Shield), an HMO, and a PPO. Ronald needs to review the packet and make a decision on which health care program fits his needs. The following is an overview of that information.

a. Blue Cross/Blue Shield plan: The monthly premium cost to Ronald will be $42.32. For all doctor office visits, prescriptions, and major medical charges, Ronald will be responsible for 20 percent and the insurance company will cover 80 percent of covered charges. The annual deductible is $500.

b. The HMO is provided to employees free of charge. The co-payment for doctor’s office visits and major medical charges is $10. Prescription copayments are $5. The HMO pays 100 percent after Ronald’s co-payment. There is no annual deductible.

c. The POS requires that the employee pay $24.44 per month to supplement the cost of the program with the company’s payment. If Ron uses health care providers within the plan, he pays the copayments as described above for the HMO. He can also choose to use a health care provider out of the service and pay 20 percent of all charges after he pays a $500 deductible. The POS will pay for 80 percent of those covered visits. There is no annual deductible. Ronald decided to review his medical bills from the previous year to see what costs he had incurred and to help him evaluate his choices. He visited his general physician four times during the year at a cost of $125 for each visit. He also spent $65 and $89 on prescriptions during the year. (For the purposes of the POS computation, assume that Ron visited a physician outside of the network plan. Assume he had his prescriptions filled at a network-approved pharmacy.)

1.What total costs will Ronald pay if he enrolls in the HMO plan?

2. What annual medical costs will Ronald pay using the sample medical expenses provided if he were to enroll in the Blue Cross/Blue Shield plan?

Please show work for both problems and I will give a thumbs up!

5. You are considering the purchase of a quadruplex apartment building. Effective gross income during the first year of operations is expected to be $33,600 ($700 per month per unit). First-year operating expenses are expected to be $13,440 (at 40 percent of EGI). Ignore capital expenditures. The purchase price of the quadruplex is $200,000. The acquisition will be financed with $60,000 in equity and a $140,000 standard fixed-rate mortgage. The interest rate on the debt financing is 8 percent and the loan term is 30 years. Assume, for simplicity, that payments will be made annually and that there are no up-front financing costs.
a. What is the overall capitalization rate?
b. What is the effective gross income multiplier?
c. What is the equity dividend rate (the before-tax return on equity)?
d. What is the debt coverage ratio?
e. Assume the lender requires a minimum debt coverage ratio of 1.2. What is the largest loan that you could obtain if you decide that you want to borrow more than $140,000?
12. An office building is purchased with the following projected cash flows:
• NOI is expected to be $130,000 in year 1 with 5 percent annual increases.
• The purchase price of the property is $720,000.
• 100 percent equity financing is used to purchase the property.
• The property is sold at the end of year 4 for $860,000 with selling costs of 4 percent.
• The required unlevered rate of return is 14 percent.
a. Calculate the unlevered internal rate of return (IRR).
b. Calculate the unlevered net present value (NPV).
2. Health Care Event Protection. Christina Haley of San Marcos, Texas, age 57, recently suffered a stroke. She was in intensive care for 3 days and was hospitalized for 10 more days. Her total bill for this care was $125,500. After being discharged from the hospital, she spent 25 days in a nursing home at a cost of $170 per day. Christina, who earns $4,500 per month, missed two months of work. Christina had a health insurance plan through her employer. The policy had a $1000 deductible and an 80/20 coinsurance clause with a $2000 coinsurance cap. She had also accumulated 21 sick days (equivalent to one month) at work. Otherwise she had no long-term care or disability income insurance.
(a) How much of Christina's direct medical expenses was paid by her insurance policy?
(b) What did Christina have to pay for her nursing home care?
(c) How much income did Christina lose?
1. Calculating Life Insurance Need. Review the material in “How Much Life Insurance Do You Need?” on pages 351–354. Then using dollar amounts that fit your personal situation, complete Worksheet 48: Determining My Life Insurance Needs from “My Personal Financial Planner.” If you are currently single and childless, for the purposes of this activity, assume that you are 30 years old, have two children under age 5, are married, and earn $60,000 per year and redo the estimate of need. How would having a family change your need for life insurance?
Determining My Life Insurance Needs (page 353)
NOTE: Results here may differ slightly than when using Appendix A in text due to rounding.
Factors Affecting Need
Sample Only
Insert Your Own Figures
1. Income-replacement needs*
$823,219
2. Final-expense needs
$ 12,000
3. Readjustment-period needs
$ 19,000
4. Debt-repayment needs
$ 10,000
5. College-expense needs
$ 75,000
6. Other special needs
$ -
7. Subtotal (combined effects of items 1–6)
$ 939,219
8. Government benefits**
$390,370
9. Investment Assets Available
$0
10. Current Life Insurance In Place
$ 98,000
11. Life insurance needed
$ 450,848
*Income Replacement Needs Calculator
Current Annual Income
$56,000
Percent of Annual Income To Be Replaced
75%
Annuity Amount (% desired of annual income)
$42,000
i (assumed interest rate
3.00%
n (number of annuity payments)
30
PV (present value) of Income Replacement Needs
$823,219
**Present Value of Social Security Benefits Calculator
Estimated Monthly Benefit (See Appendix B in Text)
$2,725.00
Estimated Annual Benefit
$32,700
i (assumed interest rate
3.00%
n (number of annuity payments)
15
PV (present value) of Government Benefits
$390,370

Mini Case:

Read the article, state the problem, list all the important information by bullet points, and write a recommendation summary and tell the reasons why.

La Boca

Stephanie Wilson must decide where to open a ready-to-wear store she’s been contemplating for several years. Now in her late 30s, she’s been working in municipal government ever since leaving college, where she majored in fine arts. She’s divorced with two children (ages five and eight) and wants her own business, at least partly to be able to spend more time with them. She loves fashion, feels she has a flair for it, and has taken evening courses in fashion design and retail management. Recently an old arcade building in the downtown section of her mid-western city had been rehabilitated and had been turned into a new shopping center and was looking for locally based retailers to make this a great local shopping option. This news crystallized her resolve to move now. She’s considering three locations.

THE DOWNTOWN ARCADE

The city’s central business district has been ailing for some time. The arcade renovation is part of a master redevelopment plan for the 1 square mile that constitutes this area. The arcade has a new department store, and the redevelopment already has a design center, and several office buildings already operating. Completion of the entire master plan is expected to take another six years.

Dating from 1912, the arcade building was once the center of downtown trade, but it had been vacant for 15 years. The renovation includes a three-level shopping facility, low-rate garage with validated parking, and convention center complex. Forty shops are planned for the first (ground) floor, 28 more on the second, and a series of restaurants on the third.

The location Stephanie is considering is 900 feet square and situated near the main ground floor entrance. Rent is $25 per square foot, for an annual total of $22,500. If sales exceed $285,000, rent will be calculated at 8 percent of sales. She’ll have to sign a three-year lease.

TENDERLOIN VILLAGE

The gentrified urban area of the city where Stephanie lives is nicknamed Tenderloin Village because of its past life as part of the meat packing area. Today, however, the neat, well-kept brownstones and comfortable neighborhood make it feel like a yuppie enclave. Many residents have done the rehabilitation work themselves and take great pride in their neighborhood.

About 20 small retailers are now in an area of the Village adjacent to the city’s sports complex with a basketball/hockey arena and an indoor tennis center. Most of them are what might be termed new-American restaurants with menu options that reflect the upscale residents. There are also three 2 small women’s clothing stores. The sports complex is located about ¾ of a mile from the center of downtown where the redevelopment plan is taking place.

The site available to Stephanie is on the Village’s main street on the ground floor of an old house. Its space is also about 900 square feet. Rent is $16,200 annually with no percentage of sales clause. The landlord knows Stephanie, but will still require a two-year lease.

APPLETREE MALL

This suburban mall has been open for eight years. A successful regional center, it has three department stores and 100 smaller shops just off a major interstate highway about eight miles from downtown. Of its nine women’s clothing retailers, three are in a price category considerably higher than what Stephanie has in mind.

Appletree has captured the retail business in the city’s southwest quadrant, though growth in that sector has slowed in the past year. Nevertheless, mall sales are still running 10 percent ahead of the previous year. Stephanie learned of plans to develop a second shopping center east of town, which would be about the same size and character as Appletree Mall. But ground breaking is still 18 months away, and no renting agent has begun to enlist tenants.

The store available to Stephanie in Appletree is two doors from the local department store’s location in the mall. At 1,200 square feet, it’s 33% larger than the other two possibilities. But it is long and narrow – 24 feet in front by 50 feet deep. Rent is $28 per square foot ($33,600 annually). In addition, on sales that exceed $480,000, rent is 7 percent of sales. There’s an additional charge of 1 percent of sales to cover common-area maintenance and mall promotions. The mall’s five-year lease includes an escape clause if sales don’t reach $480,000 after two years.

Additional Costs

Stephanie knows that rent is only one of many costs that she will incur in opening a store. Fixturing costs (racks, display units, shelving units, etc.) tend to run about $12 a square foot. While this cost can be depreciated over five years, she would still need to purchase it all at one time in setting up the store. And there would be the cost of the inventory. Stephanie has consulted with a number of people in the industry, as well as some national averages compiled by the National Retail Association, and the turnover rate for women’s clothing should be about 3.5 times a year, with a gross margin of 42%. She knows that this will be useful in determining what would be her initial investment in inventory, since she would have to pay for most of this up-front until she established a line of credit with the suppliers. And then there is the number of employees that she would need. The more hours the store 3 would be open, the more employees and the higher the payroll cost. The location at the Tenderloin Village would allow Stephanie to set her own hours. The Downtown Arcade has mandatory open hours of 10AM – 7PM, Mon.-Sat., with Sunday openings left up to the individual tenant. The parking structure will be open on Sundays with free parking and the department store that is near the arcade is open on Sunday from 12PM to 5PM. However, no stores that are in the arcade are currently open on Sunday. Appletree Mall requires all tenants to be open during mall operating hours, which are 10AM – 9PM Mon-Sat, and 11AM – 6PM on Sunday. Stephanie has about 30 days to make a decision in order to be open by the Christmas selling season.

Stephanie also has a limited budget for opening the store, she has saved up $25,000 and her parents are willing to loan her an additional $35,000 if needed. Stephanie also has a line of equity on her house which could provide an additional $35,000 in funds

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