Iycee Charles de Gaulle Summary Financial future Essay

Financial future Essay

 In planning out the financial future of any group of individuals, especially a young family, it is necessary to take many different aspects of their lives into account. The intended reward after years of investment is the end goal. The means by which to reach that goal is the needed information. Jim and Judy have come to me asking for this information; however they have not given all the answers that are needed from their end of the puzzle yet.

1. In addition to the financial information already provided by Jim and Judy I would ask the following questions. What are your objectives? What do you want to accomplish with these investments? Do you want to increase your income, build a safety net or increase the growth of your financial portfolio? I would also ask about the timeline for each of the goals that they had set. Do they want a quick return? A long term goal for future needs? Or something in between the two? Depending on the length of investment, I would also need to know what type of return they were expecting. Depending on whether they were looking for a nominal return, after tax return, total return or a real return the investment strategy would change. Lastly I would be concerned about the risk tolerances of my clients and the constraints on the investments. For risk tolerances I would want to know how tax sensitive the investments should be, if they were willing to risk losing the principal that they invest, how volatile their income is and what kind of purchasing power is to be allowed. The constraints would be dependent on the answers to these questions and the personal preferences of the investor.

2. To insure the proper investments are made and the least amount of penalties is incurred, it is always necessary to discover the liquidity of a client’s financial portfolio. In investigating Jim and Judy’s portfolio I determined that their $4,400 checking account is their most liquid investment. They are able to withdraw whatever they like without penalties. Next would be their 100 shares in Boeing because of the high stock price and due to the fact that the average trading volume in the last three months is 3,983,760 shares per day. Ranked third for liquidity would likely be the 1000 shares of XYZ biosciences. It is a small relatively unknown company with fluctuating stock prices. This makes it difficult for investors to sell. Next would likely be the $5200 in ABC equity growth mutual funds. It is composed of many investments such as bonds and stocks. It costs more to sell these shares due to commission and management fees. The 5-year CD at a commercial bank is next due to a 6 month interest surrender penalty for early withdrawal of a CD. This means that the owner cannot withdraw without any charges or penalties for 5 years. The least liquid aspect of their financial portfolio is the 401k plan that they each have. This is because investors have to pay a 10% penalty for early withdrawal and therefore receive less money than they put I if they don an early withdrawal.

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3. Instead of the 5 year CD that Jim and Judy have at this time; a better method of investing their money would be a 5-year U.S. treasury note(s). This would be a better cash cushion that the CD for various reasons. Firstly, U.S. treasury notes are fully guaranteed by the U.S. government. Secondly, the liquidity of U.S. treasury notes is better because they are easier to trade in both primary and secondary markets. Lastly, treasury notes are exempt local and state tax. The disadvantages of U.S. treasury notes is that investors have to pay federal income tax on them and the return is not substantial in the event that the investors must redeem the notes early.

4. The risk factors that exist in the mutual funds and the two stocks that Jim and Judy own are both systematic and unsystematic. The mutual funds carry a greater systematic risk because they are invested in various types of securities such as stocks and bonds.  Therefore they are not solely dependent on a firm’s performance or an issuer’s performance but on the performance of an entire market. Due to this fact the mutual funds contain market risk, interest risk, reinvestment risk, purchase power risk and exchange rate risk. The two stocks carry a more unsystematic risk because their prices fluctuate independently of each other and on a continuous basis.

5. The new company that Jim’s stockbroker has recommended would be ill advised. I would advise them to stay away from the stock because the company is not going public and may carry a greater risk than other stocks. Risk is an undesirable part of an investment portfolio. To save their money or invest it into a proven stock would be my advice.

6.        P=B/(1-MM)



The net value of the margin account will be 43.64%.

7.                  P=B/(1-MM)

  =$49.875 (1 – 0.25)


They will receive a margin maintenance call from their broker if the Ba’s share drops below $66.50.

8.                  The limit order of Judy’s stock was set at $25. The price of the stock declined through the $25 level to a spread of $24.70-$24.75. The limit of $25 was never hit right on so the limit order never executed. In order to prevent this Judy should have made the limit order a range instead of a singular number.

9.                  Provided that the stocks will be bought back by Judy after they rise to the $30 mark, she will lose $1000. This will result from the consequence of Judy selling her stock at $25 and buying back the stocks at $30.

10.              The letter of praise from the president of the company means next to nothing to investors. It is a tactic used to encourage investors to invest. It is likely however that the president doesn’t even know what the letter says. In order to get a more objective view of the company and the particular product that they are looking to invest in I would recommend analyzing at least two other reports. These reports would be the 10-K and 10-Q reports. To analyze the management situation and how the company itself is being run, I would recommend the 8-K report of the company they are interested in. These sources would provide a solid basis of information and give key results to those investing as the reports themselves tend to affect the stock price and the values of the stocks.

11.              PV= -$6750($67.5*100)

PMT= 0

N= 60

I= 4


FV= -$78,897.21

As these calculations bear out, the CD account will be worth $78,897.21 at the end of the 5 year term.

12.              PV = -6750($67.5*100)

PMT = 0

N = 7

FV = $11000($110*100)

I = ?

I = 7.23%

                                   The annual percentage on their Boeing stock will be 7.23%

13.              PV = 0                                   PMT = ?

N = 11                                   PMT = $4,271

I = 9

FV = $75,000

In order to achieve their goal Jim and Judy will be required to contribute $4,271 in to their fund to reach their goal. This will be true only if the annual growth of the ABC Equities stays at 9% per year.

14.              N = 8                         PV = ?

I = 7                           PV = $29,101

FV = $50,000

PMT = 0

In order to reach the goal of $50,000 in eight years they would have to invest an additional $29,101 with their lump sum.

15.              Assuming that there were no margin calls and that Jim and Judy have made no additional deposits and that they sell their Boeing (BA) stock at $80 they will have a capital gain of $625.  { (80 – 67.5)*50}

This capital gain will be realized when the transaction occurs.

16.              The tax on the sale of 5o shares of the Boeing stock in the 28% tax bracket will be $125. The capital gain involved would be considered long term because the sale of the shares occurred a year after the purchase of the stocks. A 4625 long term capital gain will be taxed at 20% of the gross value. Tax payers who are in the 15% bracket pay only 10% and all others pay 20%.

17.              The sale of the stocks would be recognized as a short term capital gain. Therefore the sale would be taxed at the individual’s marginal tax rate of 28%.

(625*28%) =$175 which would be the total tax on the sale.

18.       I would recommend a traditional IRA over a ROTH IRA. The amount invested in a traditional IRA is tax deductible. Jim and Judy could then use this to decrease their tax base. The amount of decrease in their tax base would be approximately 3%. This would allow them top pay less on their taxes.