Question

Investment Analysis and Portfolio Management

Case Study #1 – Single Professional

Client Fact Finder:

Name: Jennifer – age 27

1. Education: MBA in finance
2. Occupation: working for a large multi-national financial institution for past 3 years
3. Income: $ 65,000 – non-management position (no bonuses)
4. Retirement Plan: participates in company 401(k) – contributes 6% of her salary (currently there is no company match)
5. Residence: rents an apartment on Staten Island - $ 1,100.00 monthly (rent includes gas & electric)
6. Medical coverage: fully paid by employer

After a lengthy discussion with Jennifer, you have determined her goals and objectives and they are listed in order of importance:

1. maintain an emergency fund equal to 6 months of expenses
2. save for wedding
3. save for a house (plan to buy in 5 years)
4. start to save for retirement (supplement to her 401(k))

Planners Notes:

1. Jen has a good understanding of the financial markets and expects the stock market to outperform other sectors
2. She has a moderate to aggressive risk tolerance
3. Jen is engaged to Stephen and they are planning a Spring 2021 marriage
4. Jen is in the combined 28% tax bracket
5. She has $ 6,800.00 of credit card debt

Jennifer has provided the following information:

         Expenses:                                                              Assets:

                  Rent:                  $ 1,100                                       savings : $ 16,000

                  Cable:                       120                                      401(k):           8,600  

                  Phone:                     40                                         checking:         400

                  Cell phone:                150                                      EE Bonds:    6,000

                  Auto Ins:                     120                                      stocks:           7,400

                  Auto Lease:               450

                  Auto gas:                   60

                  Travel (work):            200                             Liabilities:

                  Entertainment:          400

                  Credit card:                300                                      Credit card: $ 6,800

                  Food:                          500

                  Misc:                           400

As Jennifer’s financial planner you need to do the following:

1. construct a balance sheet
2. construct a cash flow statement
3. calculate her discretionary income (amount available to invest)

4. create an investment portfolio to meet her goals and objectives

Answer 1

Balance Sheet as on 31 October 2019
Assets	$	Liabilities	$
Current Assets		Credit Card	6800
Savings	16000
Checking	400
Total Current Assets	16400
Non Current Assets
401(k)	8600
EE Bonds	6000
Stocks	7400
Total Non Current Assets	22000
Total Assets	38400	Total Liabilities	6800
Net worth = Total Assets - Total Liabilities
31600

Cash Flow Statement

For 12 months, so each expense is multiplied by 12.
Income		Expenses
Salary	65000	401k	3900	6% of pre tax salary
		Rent	13200	for 12 months
		Cable	1440	for 12 months
		Phone	480	for 12 months
		Cell phone	1800	for 12 months
		Auto Ins	1440	for 12 months
		Auto Lease	5400	for 12 months
		Auto gas	720	for 12 months
		Travel (work)	2400	for 12 months
		Entertainment	4800	for 12 months
		Credit card	3600	for 12 months
		Food	6000	for 12 months
		Misc	4800	for 12 months
		Tax @ 28% of (65000-3900)	17108
Total Income	65000	Total Expenses	67088
Investible surplus = Total Income - Total Expenses
-2088	per year
-174	per month
Monthly
Income		Expenses
Salary	5416.667	401k	325	3900 / 12
		Rent	1100
		Cable	120
		Phone	40
		Cell phone	150
		Auto Ins	120
		Auto gas	450
		Auto lease	60
		Travel (work)	200
		Entertainment	400
		Credit card	300
		Food	500
		Misc	400
		Tax	1425.667	17108 / 12
Total Income	5416.667	Total Expenses	5590.667	67088
Net cash flow	-174
She does not have any discretionary income to invest as her net cash flow is negative.

Investment plan:

Pay off 6800 in credit card debt from savings, bringing savings down to 16000-6800
9200
Her wedding is 18 months away
The average cost of a wedding in NYC is 77000 (google)
Cut cable, saving 120 a month
Cancel phone, saving 40 a month
Surrender auto lease of 450 a month, use savings of 5000 to buy a reliable used Toyota with high mileage and low maintenance, bringing savings to 4200
Do not use credit card unless she can pay off the balance in full, or she may even rather cut up the credit card and close the account
Stocks can earn up to 15% a year if invested prudently
She can halve her entertainment spending to 200 by going out less.
She should stop investing in her 401k for retirement and invest the amount in stocks, as she is confident of her abilities. Moreover, there is no employer match
She should have a simple court house wedding as she cannot afford 77000 for a wedding. Her life after the wedding is more important.
Monthly Expenses
Rent	1100
Cell phone	150
Auto ins	120
Auto gas	60
Travel (work)	200
Entertainment	200
Food	500
Misc	400
Tax @28% of 5146.667	1516.667
	4246.667
Surplus = 5146.667-4246.667
900
900 invested over 18 months gives us
₹ -19,312.07
FV(0.15,1.5,900*12,0,1)
rate = 15%, nper = 1.5 years, pmt = 900*12 per year, initial amount = 0, type = 1 as we invest at the beginning of the compounding period
which is the maximum she can earn in 18 months before her wedding.
her monthly expenses are 4247, thus a 6 month emergency fund would be	25482
She already has
Savings	4200
401k	8600
checking	400
ee bonds	6000
stocks	7400
total	26600
which she may liquidate to create her emergency fund, or wait for 2 years, and continue investing 900 a month in stocks