Managing for Corporate Value Creation - Example

A strategy using the data of the case study Student Name Student ID E-mail address Supervisor Name Academic Year Semester April 6, 2012 Outline Introduction Current financial situation Recommendations Assumptions Future financial position References Introduction First, the couple should be able to understand the concepts and basics of the aspect of assets management. It is important that they understand the operations of asset management and the various implements it uses. This involves knowing the attributes of the electronic banking system as well as how it will be beneficial to their savings as well as their checking and savings account. Asset management companies are involved in managing of different types of assets for their clients, which in most instances is in form of money. They major advantage is the extent to which they reduce the risks of losing money by pooling the money of many clients and professionally investing in different areas such as stocks and bonds. In essence, their choice of investment is based on intense research and knowledge of the dynamics governing the money market. Many companies some of which are either fraudulent or not competitive flood the field of asset management. It is for this reason that the couple should not only know where to get asset management services but also how to get the most competitive services. Asset management is a financial service. Companies that exclusively specialize in the area or financial institutions that include the aspect in their portfolio such as some banks can offer it. The best way to approach the issue is by contacting their respective banks for recommendation and then proceeding to carry out their own study depending on the history of the firm has recommended the amount of fees their charge and the interest earned. Other examples of asset management firms include depository institutions, stockbrokerage firms and firms that deal with mutual funds.Before making an recommendations to the couple, a we ask them to consider nuptial arrangement , they also take tax credit which is the safest way for the couple to pay for partner is expenses considering that is it government tax refund. Current financial situation Currently the couple has a mortgage of $ 850,000 on their home which is worth $1,050,000 and they make a payment of $83,736 ($6978per month) as mortgage cost. The couple has also three children who require $65,000 per annum for school fee. The wife has superannuation of $ 167,000 that requires contribution of $10,000 per annum while the husband has self-managed superfund of$ 65,000 in cash and requires a contribution $12,650 per annum. The couple, have also car loans where the wife pays $18,684 per annum ($1,557 per month) while the husband pays $14,928 per annum ($1,244 per month). The couple has also credit card with an outstanding amount$ 17,965 that consumes 3.5%. Recommendations Mortgage-the couple made wise decision to take the mortgage; however, I will advise them consider increasing the principal amount of the mortgage so that they will enjoy increased tax deduction. Annually the government allows deduction from basic salary payment made towards acquire a home thus reducing taxable income. Therefore, David and Jennifer should increase their mortgage costs from the current $ 83,736 per annum ($ 6,978 per month) to $ 120,000 per annum ($ 10,000 per month) so that they can reduce the mortgage period 20 years to 15 years; this means they will fully own the house when they are 55 years. It is advisable they increase the mortgage amount to avoid instances of inflation effecting their monthly contribution. The interest rate on mortgage is stable but the job market may be volatile thus affecting payment of the mortgage. Children education- The expenses for children`s education will remain the same( $ 65,000 per annum). Superannuation and Self managed super fund- the couple should think of putting their retirement savings in a qualified retirement plan where they will enjoy deferral tax payment until they receive retirement benefits. The tax benefit deferral cannot be observed at once but over the year until someone retires. When the couple contributes towards a qualified retirement plan it will be beneficial to them the money will be earn interest, which will not be taxed until they retire. The event that the money withdrawn from the fund in lump sum it will be taxed once. Currently David has a self-managed superfund whose contribution is taxed and if he changes to qualified retirement plan the contribution will not be taxed until the time of withdrawal. A person who has retired enjoys lower a marginal tax rate when he retires. Joint savings account- I could strongly recommend that they keep only about three months worth of their salaries in the joint savings account and not keep more than that because it is being eaten by inflation. Any amount beyond this suggested financial cushion of the three-month worth salary should be invested in stock market where it can earn a healthy return. The couple already have the relevant tools that will enable them to seek the services of an asset manager especially when they want to save for a house. They both have checking accounts from where they can obtain the money for their expenses as well as savings account. It is important that in the event that the income becomes more than the expenses that this money is invested wisely. Investment in stock market- I would strongly recommend high growth dividend stocks for them because they are relatively young and in the prime of their lives. They will benefit strongly from the combined capital growth and the steady dividends stock securities can provide. Insurance products that can provide pension for both of them are inferior in terms of earnings potential. It is also ironic for them to place their trusts in insurance companies as these same companies are also investing in the stock market to create their revenue using the premiums paid to them. The only drawback of investing in stocks is if a person does not know what he is doing. It is the reason why my knowledge as a financial advisor would be of great help to them. I would be able to pick the highest income producing stocks for them that will be at a level bigger than what any insurance company can provide. The income generated by some insurance policies after a certain period of time and after the policy has expired is inferior to what a decent stock can provide an investor. In addition to this, they should invest in bonds more as they get older to ensure they have enough liquidity when they are near the age that they will need more of the cash for their needs (Graham 2004). There are several choices they can select from in the bond market, but the general guiding rule should be shorter maturity dates if they think they will need a certain amount for each passing year of their life. It is to allow the stocks to continue growing and providing them with as much income as possible. They should not touch nor sell the stocks if they can help it, which is why bonds are the next asset class they should consider once they are very near their retirement age. It is only to ensure liquidity in case they might have a few problems with converting their index fund into cash for emergency purposes. This is one of the bonds they can start considering for this year and other comparable bonds for the next succeeding years. These should not be looked into however right now as they are still in their 40’s. The couple should only consider these when they are nearing the 55 years of age and above. It is at this time that they might want to risk their money in the stock market and just expect to hold it in bond form for a couple of years before liquidating it and spending it for their needs. There is little to no growth for the stocks for both of them if they are to start investing in bigger amounts later in life when the children are adults already because David was not interested in working full time in her productive years. It will take time for the compounded interest generated from stocks for them to enjoy. It is for this reason that they should do their best to maximize the amount of money they can place in stocks as early as possible. Early sacrifice for both of them would result in very positive financial earnings for them in the future. Car loan- paying for two loans for cars will attract a huge amount of interest therefore couple should use $ 20,000 from month`s salary before increasing their emergence saving to clear an outstanding loan amount of husband`s car. Then they will agree the wife`s loan will be paid within the shortest time possible to avoid to paying huge interest. Credit card- should be avoided because the cost of main ting it is going up. The couple should agree on how much they should withdraw from their funds to offset the balances. These have dramatic impact on their capacity to save and invest for their future. Their investment can reach its highest potential if they start early ,meaning, David has to increase his income as well to contribute in order to enjoy their retirement years later. Debenture- The couple should jointly own the debenture and they should not sell. Term deposit- the term deposit should be maintained. Assumptions I have made the following assumptions The couple is not planning to divorce. The husband’s business can be expanded to generate more income The family can agree to share expenses without demanding equality in paying the expenses. Future financial position After the couple has implemented the recommendations, they will have a mortgage payment of $ 120,000 per annum ($ 10,000 per month), the school fees will be of $ 65,000. The retirement plan requires a contribution of $ 10,000 per annum for each. They should increase their emergence joint account to 68,750, which is three months salary. The couple should maintain the debenture so that they can recoup it in 27 months time the amount recoup from debenture could be invested in stock exchange. The couple should also discuss how their money should be managed and keep records for references. From this perspective, the couple can come with a plan governing aspects such as monthly expenses, combined plans and individual plans. With a background they can therefore discuss the management of their finances or get the services of a professional if need be. References Bruner, RF. (1998). Case Studies in Finance: Managing for Corporate Value Creation. New York: Irwin McGraw-Hill. Graham, B. (2004). Securities Analysis. New York: McGraw Hill Graham, B. (2006). The Intelligent investor. New York: McGraw Hill Krackov, LM. & Kaushik, SK. (1988). The Practical Financial Manager. New York: New York Institute of Finance Read More