Question        1.a       (6 marks)

Marion has requested your advice in relation to her goal of continuing to self fund her    retirement.  Marion is aged 65 and, for planning purposes, expects to continue as a self funded retiree for another 30 years.

Marion has identified two key issues for you to address:

Issue 1:           Estimated duration of existing superannuation

Calculate the number of years the current superannuation fund amount of [AUD600,000] will support a net income requirement of [AUD75,000] per annum. Assume the net income        requirement does not change and the fund generates a constant return of 5% per annum.    Ignore fees and taxes.  Show your answer in years to one decimal place (for example, 10.2  years).  (3 marks)

Issue 2:           Estimated superannuation requirement to support 30 years

Calculate the required superannuation fund amount to support a net income requirement of  [AUD75,000] per annum for 30 years. Assume the net income requirement does not change and the fund generates a constant return of 5% per annum.  Ignore fees and taxes.  Show    your answer in millions to one decimal place (for example, AUD2.1 million).  (3 marks)

Question        1.b       (5 marks)

Marion no longer needs a large house and has decided to sell the property and to purchase a townhouse.  The expected proceeds from the sale of the large house is AUD2.5 million.

From these proceeds, AUD1.1 million will be used to fund the purchase of the townhouse,  AUD1.0 million will be added to the superannuation fund and the balance of AUD0.4 million will be used to establish an investment portfolio comprising Australian government bonds   and ASX listed shares.

Describe and compare the key features in general of bonds and shares as investment           securities.  In your response make sure you compare returns and risks for these two types of asset classes. (3 marks)

Make a recommendation on how much should be allocated to bonds and how much should be allocated to shares.  In your response make sure you take into account the specific        circumstances of Marion and clearly set out the reasons for the recommendation. (2 marks)

Question        1.c      (7 marks)

Within the investment portfolio, the allocation of money for shares will be invested in about 20 stocks such that the portfolio is well diversified.  Marion is considering two stocks as     described below.

Red Limited

-     share price AUD13.75

-      projected earnings per share AUD1.50

-      projected dividend per share nil

-     average price earnings ratio for similar companies 10.5 to 1

Blue Limited

-     share price AUD8.00

-      projected earnings per share AUD0.90

-      projected dividend per share AUD0.60

-     average price earnings ratio for similar companies 9.5 to 1

Red is regarded by analysts as a growth stock.  Blue is regarded by analysts as an income stock.

Marion has requested your advice on whether or not to invest in Red and/or Blue.  She is prepared to invest up to a total of AUD10,000.

The investment could be in Red (only) or in Blue (only) or in Red and Blue (in any proportion provided the total equals AUD10,000).  Or, of course, no investment in either of these two    companies is possible.

Discuss the key differences generally between a growth stock and an income stock. In your response make sure you address the different types of returns from stocks.  (3 marks)

Appraise Red and Blue and make a recommendation.  In your response make sure you clearly set out your reasons.  (4 marks)

Question        1.d      (4 marks)

One of Marion’s sisters in Portugal has developed a serious health condition.  The condition can be treated but it is expensive.  Marion has offered to pay for the medical expenses and intends to make two visits per year to Portugal for the next three years.  This will cost           approximately AUD65,000 per year (for three years).

Marion intends to use the investment portfolio to fund this abnormal expense and                 acknowledges that the likely annual income returns generated by the investment portfolio     will not be sufficient to meet all of this expense.  This means that some of the securities held in the investment portfolio will have to be sold from time to time and the proceeds used to    supplement the income returns.  Discuss the key issues that Marion will need to take into     consideration whilst managing the investment portfolio during the next three years.  (4          marks)

Question        2.a       (4 marks)

Prepare a summary of the current financial position of Fiona and Waleed.  Make sure you address their net worth and annual budget. (4 marks)

Question        2.b       (14 marks)

Fiona and Waleed would like to buy a house in the next few years.  The market price for a suitable house is approximately AUD1.8 million.

The bank has suggested the best approach would be to sell the apartment (for                    approximately AUD0.8 million), repay the existing bank loan of AUD0.6 million and use the surplus proceeds of AUD0.2 million as the deposit on the house.  On this basis the bank     indicated it would likely approve a new loan of AUD1.6 million to purchase the house.  The new loan would be interest plus principal, monthly repayments, an interest rate of 5% and a term of 25 years.

Review the financial capacity of Fiona and Waleed to service the new loan as proposed by the bank.  In your response make sure you take into consideration the period that Waleed will be on extended leave.  (4 marks)

Fiona and Waleed prefer an alternative approach that involves the commencement of a   savings plan for the deposit and retaining the apartment as an investment property.  They acknowledge that this approach will delay the purchase of the house.

Prepare a savings plan for the next four years and estimate the balance at the end of year 4. Assume that 80% of the annual surplus is available for the savings plan.  Ignore interest on  the savings.  In your response make sure you take into consideration the period that Waleed will be on extended leave.  (3 marks)

Review the financial capacity of Fiona and Waleed to service the new loan associated with  this alternative approach.  The terms of the loan and the deposit amount are the same as    the original loan as proposed by the bank.  Note that the purchase of the house will occur in year 5 (so the period that Waleed is on extended leave is irrelevant). Assume net rental      income from the apartment of AUD22,000 per annum.  (4 marks)

With reference to the results of your analysis above, make a recommendation to Fiona and Waleed.  In your response clearly set out your reasons.  (3 marks)