Preparing Financial Statements
1. Explain the difference between saving and investing.
2. List and explain investors' motivation for investing in stocks, bonds, preferred shares, and convertibles based on the characteristics of each of these financial vehicles from the risk and income perspective of investors.
3. Sylvia comes to you for advice in organizing her financial affairs. She is 29 years old and makes $50,000 per year, 30% of which goes to payroll deductions and taxes. Sylvia also receives interest of $400 per year from miscellaneous investments and savings accounts.
Sylvia has tracked her expenses for the last six months and provides you with the following estimates for the year:
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Mortgage payments, including property taxes and interest
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$5,886
($3,094 is interest)
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Groceries
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$3,600
|
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Holidays
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$3,500
|
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Car payments, including interest
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$4778
($958 is interest)
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Utilities
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$3,000
|
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House and car insurance
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$1,600
|
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Gas for auto
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$2,200
|
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Auto maintenance
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$600
|
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Life and disability insurance premiums
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$400
|
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House maintenance
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$1,500
|
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Household expenses
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$600
|
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Medical and dental expenses
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$400
|
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Entertainment and lunches
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$5,500
|
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Gifts
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$1,400
|
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Clothing
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$3,400
|
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Miscellaneous expenses
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$3,200
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Sylvia has the following assets:
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House value
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$100,000
|
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Cash in the bank
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$1,800
|
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CSB's
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$8,000
|
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Furnishings and personal assets
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$18,000
|
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Auto
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$20,000
|
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RRSP
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$28,500
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Sylvia has the following debt:
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Credit card balances owing
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$2,800
|
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Line of credit owing
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$5,000
|
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Mortgage
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$62,000
|
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Car loan
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$18,500
|
Required
a. Based on the information provided, prepare a net worth statement and an annual cash flow statement for Sylvia.
b. Sylvia also has plans for saving and investing, and wants to find a way to "pay herself first.". She is willing to make adjustments to her spending habits and would like to see the effect of putting away 10% of her net pay for investing. Draw up a proposed future cash flow budget that will incorporate her ideas.
4. Explain three advantages and three disadvantages of investing in mutual funds over directly investing in assets such as stocks and bonds.
5. Discuss why investors may be attracted to investing in ETF's over mutual funds.
6. Describe why investors will commonly allocate a reasonable percentage of their investment portfolio into bonds.
7. Describe the difference between an investor that has a high risk tolerance versus an investor with a low risk tolerance.