Discussion Case 1: This case is available in MyFinanceLab.
Rick Phillips has usually been just a market watcher and not a market participant; however, he recently received $15,000 for the movie rights to his new book. Rick has never before had the resources to invest and therefore owns no other security investments, but he has followed sev-eral telecom stocks over the past year. The share prices have fluctuated dramatically, but Rick is definitely interested in this type of stock. He feels that wireless telecommunication companies offer great possibilities. When you asked Rick if he was comfortable with the risk associated with such an investment, he indicated that he would be if superior returns could be obtained.
Questions
1. Given the fact that Rick has only $15,000 to invest, explain why he should consider invest-ing in mutual funds rather than individual stocks.
2. In what type(s) of stock mutual fund(s) would you recommend Rick invest? Why?
3. In helping Rick make an investment choice, what factors would you explain to him as most important when choosing a mutual fund?
4. Although most mutual funds will provide Rick with some level of diversification, what type of risk will Rick still be exposed to if he purchases a single mutual fund?
5. To assure Rick of the liquidity and marketability of his investment, would you recommend that he invest in an open-end or a closed-end mutual fund? Why?
6. In terms of costs, would you recommend load or no-load funds to Rick? Why?
Discussion Case 2: This case is available in MyFinanceLab.
Bill (age 42) and Molly (age 39) Hickok, residents of Anchorage, Alaska, recently told you that they have become increasingly worried about their retirement. Bill, a public school teacher, dreams of retiring at 62 so they can travel and visit family. Molly, a self-employed travel consul-tant, is unsure that their current retirement plan will achieve that goal. She is concerned that the cost of living in Alaska along with their lifestyle have them spending at a level they could not maintain. Although they have a nice income of more than $100,000 per year, they got a late start planning for retirement, which is now just 20 years away. Bill has tried to plan for the future by contributing to his 403(b) plan, but he is only investing 6 percent of his income when he could be investing 10 percent. Use what they told you along with the information below to help them prepare for a prosperous retirement.
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Molly's income
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$78,000
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Bill's income
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$42,000
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Social Security income at retirement
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$2,600/mo
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Current annual expenditures
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$70,000
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Bill's Roth IRA
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$20,000
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Bill's 403(b) plan
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$47,800
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Marginal tax bracket
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25 percent
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Questions
1. Do Bill and Molly qualify for any other tax-advantaged saving vehicles? If so, which ones? To what extent?
2. Since Bill does not receive an employer match, should he invest the maximum amount in his Roth IRA annually or just invest more in his 403(b)? Defend your answer.
3. Assuming Bill and Molly can reduce expenses and invest more, how do their retirement savings limits differ before and after age 50?
4. Calculate the future value income need for their first year in retirement, assuming a 3 percent inflation rate and an 80 percent income replacement.
5. Calculate the projected annual income at retirement that will be generated by their port¬folio, assuming an 8 percent nominal rate of return, a 20-year retirement period, and no further contributions.
6. Given their projected Social Security and investment income, how much will Bill and Molly need to invest annually to make up their income shortfall? Into what account(s) would you suggest they make the investments?