Nature of the Asset and Risk Profile for Jerry and Jones - Case Study Example

ANZ Financial Planners 5th may 2016 Jerry and jones 5th may 2016 The report on the nature of the Asset and risk profile for jerry and Jones Thank ypu Jerry and Jone for Accept us to be you financial planner. We wish to inform that our analysis follows a comprehensive evaluation and use of forecasting tool such as the superannuation and discounting model in order to provide an understanding of you current and future financial situation. Our assessment provide that you (Jerry and Jone) should have an investment in portfolio diversification in order to provide sufficient cash to fiancé your living standard after retirement Age since, it is evident that you have a reserve ratio of 75% which is quite high as compared to invested cash. The asset and income appraised provided that the forecast for the financial period ending 2017 is appropriate since, there shall be sufficient to finance there cost of life when they retire. Kindly find the attached compressive examination of the asset and resource. Yours kindly Kennedy Ramsey 1.0 Cash flow statement for the three years ending 2017 Jerry Jenny Total 2016 2016 2017 Salary Income $50,000 $155,000 $159,650 $164,440 Investment $ - $ - Commonwealth Bank shares 625 shares $ - $25,000 $25,000 $26,250 $27,563 Saving account with Bundoora credit union $26,900 $28,245 $29,657 Term deposit with Bundoora credit union – 3 month rolling balance $165,000 $173,250 $181,913 less; Deductible expense $75,000 $371,900 $387,395 $403,573 Work related expenses ($1,000) ($2,500) ($2,575) ($2,652) Insurance ($3,000) ($3,090) $3,183 Entertainment ($4,300) ($4,429) ($4,562) Utilities ($8,000) ($8,240) ($8,487) Motor vehicle expenses ($8,500) ($8,755) ($9,018) Sundries ($2,000) ($2,060) ($2,122) Cash income before tax $149,000 $1,333,600 $358,246 $379,915 less; tax (Working) ($32,777) ($105,695) ($108,865) ($112,132) after tax income $116,223 $1,227,905 $249,381 $267,783 Less; household expense ($25,800) ($26,574) ($27,371) One off capital item Personal car ($16,000) ($16,480) ($16,974) Family home ($250,000) ($267,500) ($294,812) Surplus deficit $116,223 $936,105 $188,208 $196,409 2. Balance sheet for the three years ending 2017 Owner Amount 2016 2016 2017 Balance Sheet Lifestyle assets Owner Amount Family home Joint $620,000 $663,400 $709,838 Boat Jenny $50,000 $51,500 $53,045 Home Contents (Insured value) Joint $ 80,000 Joint $90,000 Motor Vehicles (Insured value) John $ 60,000 joint $64,000 $824,000 $824,000 $714,900 $762,883 Investment assets Commonwealth Bank shares 625 shares Jenny $25,000 $26,250 $27,563 Saving account with Bundara credit union jerry $26,900 $28,245 $29,657 Term deposit with Bundoora credit union – 3 month rolling balance jerry $165,000 $173,250 $181,913 Superannuation (ComSuper) – conservative fund jerry $195,000 $204,750 $214,988 Superannuation (Hesta Superannuation) – capital stable fund jenny $135,000 $546,900 $574,245 $602,957 Total assets $1,370,900 $1,721,640 $1,819,961 Less Borrowings Home mortgage (5.8% p.a.) Joint ($25,400) ($23,927) $22,539 $21,232 Credit cards (16.5% p.a.) Joint ($6,000) $5,010 ($4,183) $3,493 Car loan (8.5% p.a.) Joint ($4,100) ($35,500) ($32,483) ($29,722) Net Worth $1,316,483 $1,707,513 $1,814,964 From the above statement of financial position, it is apparent that the couples (Jerry and Jones) will have the asset improve by the year 2017. The implication here is that jerry and Jone will have enough cash from investment to fiancé their cot of life when they retire. The couple must as a result guarantee that the financial investment is sufficient and dependable if cash that is sufficient in terms of meeting their cost of life is needed. The good side of having an investment for the couples is that there shall be sufficient cash from reruns on invested capital which will afterwards leads to investment in portfolio in order to minimize risk and increase the return on investment portfolios (Alastair Graham, 2000). 3. 1 Accrued superannuation Calculation of the tax computation Tax calculation Jerry Jenny Taxable Income Tax on Taxable Income Marginal Tax Employment income Tax payable Rate salary 105000 50000 $0 - $18 Nil 0 Tax 0 $18,201 - $37,000 $0 + 19% over $18,200 19% $19,950 $9,500 $37,001 - $80,000 $3,572 + 32.5% over $37,000 33% $34,650 $13,365 $80,001 - $180,000 $17,547 + 37% over $80,000 37% $38,850 $10,115 $180,000 + $54,547 + 47%* over $180,000 47% Net tax payable $72,917 $32,777 Superannuation for 20 years to year ending 2030 Year Age Salary increase Salary Contribution Opening super balance ADD; Employer contribution Contribution rate Less;15% contribution tax Add; net earning Closing super balance 2016 45 130% $155,000.0 115% 330000.0 14275.0 150% $21,413.0 $936,105.0 $346,416.0 2016 46 130% $159,650.0 115% 379500.0 16124.0 150% $24,186.0 $936,105.0 $398,043.0 2017 47 130% $164,440.0 115% 436425.0 17656.0 150% $26,483.0 $936,105.0 $456,729.0 2018 48 130% $169,373.0 115% 501889.0 19333.0 150% $28,999.0 $936,105.0 $524,122.0 2019 49 130% $174,454.0 115% 577172.0 21170.0 150% $31,754.0 $936,105.0 $601,517.0 2020 50 130% $179,688.0 115% 663748.0 23181.0 150% $34,771.0 $936,105.0 $690,406.0 2021 51 130% $185,078.0 115% 763310.0 25383.0 150% $38,074.0 $936,105.0 $792,500.0 2022 52 130% $190,630.0 115% 877807.0 27794.0 150% $41,691.0 $936,105.0 $909,770.0 2023 53 130% $196,349.0 115% 1009478.0 30435.0 150% $45,652.0 $936,105.0 $1,044,477.0 2024 54 130% $202,240.0 115% 1160899.0 33326.0 150% $49,989.0 $936,105.0 $1,199,224.0 2025 55 130% $208,307.0 115% 1335034.0 36587.0 150% $54,880.0 $936,105.0 $1,377,109.0 2026 56 130% $214,556.0 115% 1535289.0 40062.0 150% $60,094.0 $936,105.0 $1,581,361.0 2027 57 130% $220,993.0 115% 1765583.0 43868.0 150% $65,803.0 $936,105.0 $1,816,031.0 2028 58 130% $227,623.0 115% 2030420.0 48036.0 150% $72,054.0 $936,105.0 $2,085,661.0 2029 59 130% $234,451.0 115% 2334983.0 52599.0 150% $78,899.0 $936,105.0 $2,395,472.0 2030 60 130% $241,485.0 115% 2685230.0 57596.0 150% $86,394.0 $936,105.0 $2,751,466.0 Jerry Jenny Opening balance $195,000.0 $135,000.0 Rate of employer contribution 9.50% 9.50% Annual rate of return 15% 15% Contribution tax 5.2 4.9 Current salary $105,000.0 $50,000.0 Salary increase 3% 3% Years to retirement 15 15 4.1 The risk profile of the Jerry and Jones According to the risk profile for the couples as observed above, Jerry and jone are aggressive couples with a reserve ratio ,of 76% would mean that the coupes will have an opportunity of investing more in order tom realize high return in the near future. Jerry and Jones must therefore guarantee that they venture the excess cash in a diversified investment portfolio with the right class of group that is volatile with high return. The asset shows that the couple has a liquidity ratio of 5.1 in asset to debt respectively. The worth of asset is appropriate implying that the investment options will lead to improved return for Jerry and Jones. The impact of this is that the risk profile for the couple will be aggressive due to the fact that it require performance of investment option as also Jerry and should understand the extent that the risk exposure will have on their returns so as to efficiently control risk. The investment is focused on investing more on securities that will yield high return within the shortest time possible (Taylor, 2005). 4.1 The couple’s current asset allocation (across all their investments including super) Current Asset Allocation Name of investment Cash Fixed Interest Property Australian shares Total Fixed home $480,000.00 $480,000.00 Boat $20,000.00 $20,000.00 Cars $35,000.00 $35,000.00 Commonwealth Bank shares $25,000.00 $25,000.00 Term deposit with Bundoora $165,000.00 $165,000.00 Home mortgage $14,500.00 $14,500.00 Personal car loan $1,360.00 $1,360.00 credit card $990.00 $990.00 Total of asset class in $ terms $165,000.00 $16,850.00 $535,000.00 $25,000.00 $741,850.00 Total of asset class in % terms 22 2 72 3 100 From the above asset allotment for Jerry and Jone, it is evident that their asset are valued at 20% implying that Jerry and Jones ventured long-term venture, the current asset allotment is steady with the risk profile of Jerry and Jone since they are purposeful of their venture alternatives in long-term securities with high returns. The amount of cash held as reserve depicts a value of 76% which is big as compared to cash invested. The couple needs to invest more of the cash reserves in order capitalize on high return when they retire. 5.1 investigating the risk and situation Analyzing financial situation Balance sheet concerned with a person’s net worth Net worth ratio {total net worth/total assets} {$824000-$35500)$/1370900}=0.6 Liquidity ratio =liquid assets/current debt {$824000/$546900}=1.5 Cash flow statement concerned with generating a cash surplus Savings ratio cash surplus= (savings)/Net income after tax {$936105.35/1227905.35}=0.8 Debt service ratio ={monthly loan repayments/Monthly net income after tax} {$35500/$102408.78}=0.4 It is evident from the above working that risk profile for Jerry and Jone shows high a reserves ratio implying that the asset allotment is risky since, less is invested hence, and there future life after the age of retirement is nit guaranteed. In this regards, the risk profile for the couples need t be managed by appraising the investment options that best suits the couples in terms of cash, risk and return realized in the near future. The likely investment for the couple is the growth in deposit amount in superannuation account in to secure the future wealth at the age of retirement to meet the living cost of the couples. Liquidity ratio is 1.5 in terms of debt to asset respectively. This would mean that the asset’s risk for jerry and Jones is manageable since amount of asset is very high as compared to debt commitment (W. Albrecht, 2007). With a net worth of 60%, more can be invested for the couple which makes it less risky. The ratio is provided in the graph below in an effort of create a bigger picture of the couple’s risk profile and alternatives to appraise areas that need investment now to guarantee future return for the couples The graph of financial situation 5.2four possible financial strategies that the couple may be able to use to improve their short-term and long-term financial situation. Financial projection (Use of Superannuation) Superannuation is an important forecast tool since, it provide an apparent comprehension of the anticipated financial performance and thus it is deem worthwhile for jerry and Jones at the time of their retirement which is quite high implying that viable investment options would be recommended would to meet their future cost of living effectively (Weygandt, 2009). This will just be realized where future cash flows is discounted in year one to establish the needed capital outlay that will yield positive return and saved in the superannuation account or venture in an investment with high return. An ideal forecast tool for the couple’s case would be the one that will yield a clear comprehension to have enough cash when they retire in this case, from our analysis, superannuation was considered one of the best too since, it creates an apparent comprehension by evaluating the cash required and the cash allotted to venture. The effect of Asset diversification An investor is advised to hold a portfolio of investment since, efficient portfolio would lead to high return with less risk as much as the investment are volatile but, risk are diversified. The reasons for having an efficient portfolio is to combine a viable venture alternative for the couples that depict the best characteristic of high return within the shortest time possible and low risk on investment. Time value for money (Use of NPV) Appraising an investment using net present value is important since, it provide an understanding of the amount to be invested now in order to provide positive returns in the future. Discounting is hence important in securing the cash to be invested now. An informed verdicts on best venture alternatives based on the available cash is important in appraising the future fiancé planning for jerry and Jones. The benefit of using discounting factor as forecasting tool is that, discounting tool provides the amount required at year one which is now in order to provide high return to an investor (W. Albrecht, 2007). 6. The appropriateness of the strategy for the couple Liquidity risk as 2017 will be {Asset/liability) Liquidity= ($189961/$54447) =33 It is apparent from the working of liquidity risk above that, the couples will realize high liquidity ratio by 2017 which will mean that Jerry and Jones depict a high risk profile which is controllable. We deem that venture proposal will be ideal since, high return will be realized in return. It is depicted that the net income and the net asset for the couple will experience an increase by the financial; period ending 2017 meaning that the venture options is realistic for the couples. Balance of term deposit by 2017 will be $181,913 Deposit 20% Amount as deposit= {20%*$181, 1913=$36,383 Price range is -5%+5% Price range= {1.05*$218296) =$229,210.4 AT 95% Level Price range= {95%*$219296} =$207,381 Amount needed to be borrowed from bank will, be {$229219-$1819113} =$47,298 The balance of term depict for the couple as observed in the workings above provides that the couples can comfortably manage their loan repayment. This is because, the net worth of their venture is estimated to be $21829 {$229,210-$207,381}.in this regards, it might be concluded that the coupes will able to fiancé their loan up to a maximum of $4188113. The excess of $47298 shall be financed using the loan. The value of the loan financed is deem to be least and manageable in terms of repayment with net income and asset being the collateral for loan for the couples (Jerry and Jones. The value ratio shall therefore be 39 {$819961/$47287} Which would mean that the net asset is being sufficient by the year ending 2017 in order to finance the loan as well as the interest on loan efficiently for the couples (Alastair Graham, 2000). Bibliography Barbara Smith, ‎.K., 2002. Personal Financial Planning and Superannuation. Barbara Smith, ‎.K., 2011. The Superannuation Handbook 2008-09. Barbara Smith, ‎.K., 2014. DIY Financial Planning: Creating Wealth Through Careful. D., P., 1988. Superannuation: a union perspective. Sydney. John Day, ‎.B.‎.D., 2014. Australian Financial Planning Handbook. Knox, D., 1994. Superannuation: Contemporary Issues - Page 26. New York. Phillip A. Swain, ‎.R., 2015. In the Shadow of the Law: The Legal Context of Social Work. Sydney. Taylor, L.A., 2005. Superannuation Made Easy. Sydney. Toten, M., 2006. Financial Planning - Page 35. Warren McKeown, ‎.K.‎.O., 2012. Financial Planning, Google eBook. Appendices 1.0 Cash flow statement for the three years ending 2017 Jerry Jenny Total 2016 2016 2017 Salary Income $50,000 $155,000 $159,650 $164,440 Investment $ - $ - Commonwealth Bank shares 625 shares $ - $25,000 $25,000 $26,250 $27,563 Saving account with Bundoora credit union $26,900 $28,245 $29,657 Term deposit with Bundoora credit union – 3 month rolling balance $165,000 $173,250 $181,913 less; Deductible expense $75,000 $371,900 $387,395 $403,573 Work related expenses ($1,000) ($2,500) ($2,575) ($2,652) Insurance ($3,000) ($3,090) $3,183 Entertainment ($4,300) ($4,429) ($4,562) Utilities ($8,000) ($8,240) ($8,487) Motor vehicle expenses ($8,500) ($8,755) ($9,018) Sundries ($2,000) ($2,060) ($2,122) Cash income before tax $149,000 $1,333,600 $358,246 $379,915 less; tax (Working) ($32,777) ($105,695) ($108,865) ($112,132) after tax income $116,223 $1,227,905 $249,381 $267,783 Less; household expense ($25,800) ($26,574) ($27,371) One off capital item Personal car ($16,000) ($16,480) ($16,974) Family home ($250,000) ($267,500) ($294,812) Surplus deficit $116,223 $936,105 $188,208 $196,409 2. Balance sheet for the three years ending 2017 Owner Amount 2016 2016 2017 Balance Sheet Lifestyle assets Owner Amount Family home Joint $620,000 $663,400 $709,838 Boat Jenny $50,000 $51,500 $53,045 Home Contents (Insured value) Joint $ 80,000 Joint $90,000 Motor Vehicles (Insured value) John $ 60,000 joint $64,000 $824,000 $824,000 $714,900 $762,883 Investment assets Commonwealth Bank shares 625 shares Jenny $25,000 $26,250 $27,563 Saving account with Bundara credit union jerry $26,900 $28,245 $29,657 Term deposit with Bundoora credit union – 3 month rolling balance jerry $165,000 $173,250 $181,913 Superannuation (ComSuper) – conservative fund jerry $195,000 $204,750 $214,988 Superannuation (Hesta Superannuation) – capital stable fund jenny $135,000 $546,900 $574,245 $602,957 Total assets $1,370,900 $1,721,640 $1,819,961 Less Borrowings Home mortgage (5.8% p.a.) Joint ($25,400) ($23,927) $22,539 $21,232 Credit cards (16.5% p.a.) Joint ($6,000) $5,010 ($4,183) $3,493 Car loan (8.5% p.a.) Joint ($4,100) ($35,500) ($32,483) ($29,722) Net Worth $1,316,483 $1,707,513 $1,814,964 3. 1 Accrued superannuation Calculation of the tax computation Tax calculation Jerry Jenny Taxable Income Tax on Taxable Income Marginal Tax Employment income Tax payable Rate salary 105000 50000 $0 - $18 Nil 0 Tax 0 $18,201 - $37,000 $0 + 19% over $18,200 19% $19,950 $9,500 $37,001 - $80,000 $3,572 + 32.5% over $37,000 33% $34,650 $13,365 $80,001 - $180,000 $17,547 + 37% over $80,000 37% $38,850 $10,115 $180,000 + $54,547 + 47%* over $180,000 47% Net tax payable $72,917 $32,777 Superannuation for 20 years to year ending 2030 Year Age Salary increase Salary Contribution Opening super balance ADD; Employer contribution Contribution rate Less;15% contribution tax Add; net earning Closing super balance 2016 45 130% $155,000.0 115% 330000.0 14275.0 150% $21,413.0 $936,105.0 $346,416.0 2016 46 130% $159,650.0 115% 379500.0 16124.0 150% $24,186.0 $936,105.0 $398,043.0 2017 47 130% $164,440.0 115% 436425.0 17656.0 150% $26,483.0 $936,105.0 $456,729.0 2018 48 130% $169,373.0 115% 501889.0 19333.0 150% $28,999.0 $936,105.0 $524,122.0 2019 49 130% $174,454.0 115% 577172.0 21170.0 150% $31,754.0 $936,105.0 $601,517.0 2020 50 130% $179,688.0 115% 663748.0 23181.0 150% $34,771.0 $936,105.0 $690,406.0 2021 51 130% $185,078.0 115% 763310.0 25383.0 150% $38,074.0 $936,105.0 $792,500.0 2022 52 130% $190,630.0 115% 877807.0 27794.0 150% $41,691.0 $936,105.0 $909,770.0 2023 53 130% $196,349.0 115% 1009478.0 30435.0 150% $45,652.0 $936,105.0 $1,044,477.0 2024 54 130% $202,240.0 115% 1160899.0 33326.0 150% $49,989.0 $936,105.0 $1,199,224.0 2025 55 130% $208,307.0 115% 1335034.0 36587.0 150% $54,880.0 $936,105.0 $1,377,109.0 2026 56 130% $214,556.0 115% 1535289.0 40062.0 150% $60,094.0 $936,105.0 $1,581,361.0 2027 57 130% $220,993.0 115% 1765583.0 43868.0 150% $65,803.0 $936,105.0 $1,816,031.0 2028 58 130% $227,623.0 115% 2030420.0 48036.0 150% $72,054.0 $936,105.0 $2,085,661.0 2029 59 130% $234,451.0 115% 2334983.0 52599.0 150% $78,899.0 $936,105.0 $2,395,472.0 2030 60 130% $241,485.0 115% 2685230.0 57596.0 150% $86,394.0 $936,105.0 $2,751,466.0 Jerry Jenny Opening balance $195,000.0 $135,000.0 Rate of employer contribution 9.50% 9.50% Annual rate of return 15% 15% Contribution tax 5.2 4.9 Current salary $105,000.0 $50,000.0 Salary increase 3% 3% Years to retirement 15 15 4.1 The couple’s current asset allocation (across all their investments including super) Current Asset Allocation Name of investment Cash Fixed Interest Property Australian shares Total Fixed home $480,000.00 $480,000.00 Boat $20,000.00 $20,000.00 Cars $35,000.00 $35,000.00 Commonwealth Bank shares $25,000.00 $25,000.00 Term deposit with Bundoora $165,000.00 $165,000.00 Home mortgage $14,500.00 $14,500.00 Personal car loan $1,360.00 $1,360.00 credit card $990.00 $990.00 Total of asset class in $ terms $165,000.00 $16,850.00 $535,000.00 $25,000.00 $741,850.00 Total of asset class in % terms 22 2 72 3 100 5.1 investigating the risk and situation Analyzing financial situation Balance sheet concerned with a person’s net worth Net worth ratio {total net worth/total assets} {$824000-$35500)$/1370900}=0.6 Liquidity ratio =liquid assets/current debt {$824000/$546900}=1.5 Cash flow statement concerned with generating a cash surplus Savings ratio cash surplus= (savings)/Net income after tax {$936105.35/1227905.35}=0.8 Debt service ratio ={monthly loan repayments/Monthly net income after tax} {$35500/$102408.78}=0.4 The graph of financial situation Read More