FIN 101 Lecture Notes - Lecture 4: Mutual Fund, Cash Flow, Savings Account

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salmonmuskrat60

27 Sep 2016

School

Ball State University

Department

Finance

Course

FIN 101

Professor

Olga S Mc Atee

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Document Summary

*the process of organizing and planning your income, expenses and savings to accomplish significant long-term goals. The preliminary step of financial planning process. Cost of living is the general increase on the cost of goods and services due to inflation (pg. The goal of investing is usually long-term, specific and measurable. Addresses the concept that a dollar today is better than a dollar tomorrow. How much consumer debt you are carrying relative to your income (pg. The single most important financial goal and the most expensive long-term goal you have to set. A college graduate will earn on average three times more than a high school graduate over time. Budgets provide a structure that recognizes financial goals and organizes spending to meet those goals (pg. Paying yourself first, funding your financial goals each month (pg. Preparing budget begins with defining income and expenses.

Related Questions

Scenario 1 Financial Goals

Lisa is getting married during memorial-day weekend and is excited to start her new life. She has a shared her financial data with you: Monthly income: $2400 Living Expenses: $2200 Savings: $3000 Student Loans: $35000 Credit card debt: $1500 Lisa has many dreamsâ like buying a new car and going to Hawaii in December. She also wants to pay off her credit card debt and student loans. She wants to buy a house in the next 5-7 years, and eventually start saving for retirement and for her childâs college education. She does not know where to start and you know that she needs to convert her dreams into clearly defined goals. Identify what her short term, intermediate, and long term goals are and explain to her the importance of SMART financial goals in her financial planning process

jadegrasshopper877

Which of the following tends to insulate management somewhat from the financial results of poor financial planning? (Pick the best answer.)

A. Capitated rates

B. Cost reimbursement

C. Bundled services

D. Charge payment

5 points

Question 2

The cash budget focuses on which of the following major activities:

A. Purchasing of resources

B. Collection

C. Production/sale of service

D. All of the above

5 points

Question 3

Which of the following is an element of budgeted financial requirements that is not included in budgeted expenses?

A. Interest expense

B. Increases in working capital

Question 4

A department manager most often uses his or her hospitalsâ financial information for which of the following uses:

A. Assess the financial condition of the hospital

B. Assess the efficiency of operations

C. Evaluate the hospitalâs stewardship

D. Assess the effectiveness of operations

5 points

Question 5

18. You have just advance refunded $50 million of outstanding tax-exempt revenue bonds with $40 million of new debt, which created a gain after considering reimbursement effects of $5.0 million. What could account for this?

A. Higher interest rate on the refunding issue

B. Lower interest rate on the refunding issue

C. Positive arbitrage on the refunding issue

D. None of the above

5 points

Question 6

A not-for profit nursing home has total expenses of $20 million. Sales tax in the state is 7%. Expenses are broken down into salaries ($12 million), supplies ($6 million), and pharmacy ($2 million). The benefit received by the nursing home from the sales tax exemption assuming that pharmacy items are exempt from state sales tax is?

Question 7

Which of the following is not one of the four critical questions that must be answered for dashboard reporting?

A. What is the firmâs strategic vision?

B. What is most important to the firmâs success?

C. What are the critical drivers that influence performance attainment?

D. What are the most relevant measures that reflect critical driver relationships?

5 points

Question 8

What of the following is not one of the characteristics of long-term debt financing?

Question 9

The controller in a hospital is usually responsible for which of the following activities (choose all that apply):

A. Collection of accounts receivable

B. Developing budgets

C. Filing Medicare cost reports

D. Arranging hospital loans

5 points

Question 10

The heading of every financial statement should contain the:

A. name, title, and place of business

B. name, title, and specific date of statement

C. name, title, specific date of statement, and unit of measurement

D. title, name, type of ownership, and unit of measurement

5 points

Question 11

The Catholic Healthcare Association recognizes which of the following as legitimate areas of community benefit?

A. Bad Debts

B. Unreimbursed Medicare Costs

C. Both A and B

D. Neither A nor B

5 points

Question 12

The following is an example of a _____________ budget: âThe budget for the radiology department is different at 90 percent occupancy than at 80 percent occupancy.â

Question 13

Which of the following is not a âprincipleâ of financial accounting?

A. Historical cost

B. Revenue recognition

C. Continuity

D. Matching

5 points

Question 14

Accounts receivable (net) increased by $500,000 during the year. This increase has what effect on cash flow?

Question 15

What should be a firmâs primary long-term financial objective?

Question 16

A statement that reports inflows and outflows of cash during the accounting period in the categories of operations, investing, and financing, is called a(an):

A. Income statement

B. Statement of retained earnings

C. Balance sheet

D. Statement of cash flows

5 points

Question 17

Strategic planning should _________ financial planning.

A. follow

B. precede

C. be contemporaneous with

D. None of the above

5 points

Question 18

The statistics budget:

A. forecasts operating revenues that will be earned during the budget period

B. identifies the amount of service that will be provided by departmental area

C. represents an organization's expected cash inflows and outflows based on the previous years' cash flows

D. identifies operating expenses that are expected to be incurred during the budget period

5 points

Question 19

What is net working capital?

A. Current assets less long-term liabilities

B. Current assets less current liabilities

C. The amount of permanent financing required to finance working capital or current assets.

D. Both B and C

5 points

Question 20

The working capital cycle looks at which of the following:

A. Obtaining cash

B Turning cash into resources and paying bills

C. billing and collecting revenues earned

D. All of the above

5 points

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aquamarinedolphin276

Roger McDonald, 55 years old and single, is a dental surgeon and owns a dental practice. Roger has accumulated a SGD2,000,000 investment portfolio with a large concentration in small-cap Singapore equities. Over the last 5 years the portfolio has averaged 15 percent annual total return on investment. Roger does not expect to retire before he is 70 years old. His current income is more than sufficient to meet his expenses. Upon retirement, he plans to sell his medical practice and use the proceeds to purchase an annuity to cover his retirement cash flow needs. He has no additional long term goals or needs.
In consultation with Roger, his investment advisor, Justin Teo has drawn up an investment policy statement with the following elements (Justinâs notes justifying each item are included):
Risk tolerance: Roger has above average risk tolerance.
Justinâs notes:
- Rogerâs present investment portfolio and his desire for larger returns indicate a high willingness to take risk.
- His financial situation (largely current asset base, has ample income to cover expenses, lack of need for liquidity or cashflow, and long time horizon) indicates a high ability to assume risk.
Return Objective: The return objective is an average total return of 10 per cent or more with a focus on long-term capital appreciation.
Justinâs notes:
- Rogerâs circumstances warrant an above-average return objective that emphasizes capital appreciation for the following reasons:
- Roger has a sizable assert base and ample income to cover his current spending; therefore, the focus should be on growing the portfolio.
- Rogerâs low liquidity needs and long time horizon support an emphasis on a long term capital appreciation approach.
- Roger does not rely on the portfolio to meet living expenses.
-The numerical objective of 10 per cent represents an estimate of a target Roger can aim for rather than a minimum return required to meet a specific financial goal.

Liquidity: Rogerâs liquidity needs are low.
Justinâs notes:
- Roger has no regular cash flow needs from the portfolio, because the income from his medical practice meets all current spending needs.
- No large, one-time cash needs are stated. However, it could be considered appropriate to keep a small cash reserve for emergencies.
Time Horizon: Rogerâs time horizon is long term and consists of 2 stages:
(1) The first stage consists of the time until his retirement, which he expects to be 15 years.
(2) The second consists of his lifetime following retirement, which could range
from 10 to 20 years. Justin has also summarised Rogerâs current portfolio in Exhibit 1 below:
Value Total Return Deviation
Short-term Bonds $200,000 10% 4.6% 1.6%
Domestic Large-Cap Equities $600,000 30% 12.4% 19.5%
Domestic Small-Cap $1,200,000 60% 16.0% 29.9%
Total Portfolio $2,000,000 100% 13.8% 23.1%
Exhibit 1: Rogerâs Current Investment Portfolio

Roger expects to receive an inheritance of SGD2,000,000 soon. Roger and Justin sit down to discuss its investment in one of the four index funds. Given Rogerâs already above average risk tolerance and level of portfolio risk, Roger and Justin have concluded that the risk tolerance description in the current IPS remains valid; they do not want to contemplate further increase in portfolio risk. On the other hand, they do not wish to reduce expected return. Justin is evaluating the four index funds shown in Exhibit 2 below for their ability to produce a portfolio that will meet the following two criteria relative to the current portfolio:
- Maintain or enhance expected return, and
- Maintain or reduce volatility.

Each Fund in Exhibit 2 is invested in an asset class that is not substantially represented in the current portfolio shown in Exhibit 1. Exhibit 2 presents statistics on those index
funds.
Expected Expected Correlation of
Index Annual Annual Standard Returns with Current
Fund Return Deviation Portfolioâs Return
Fund A 15% 25% +0.80
Fund B 11% 22% +0.60
Fund C 16% 25% +0.90
Fund D 14% 22% +0.65
Exhibit 2: Expected Risk, Return and Correlation of 4 Index Funds under Consideration

Question 1
(a) Recommend the most appropriate index fund to add to Rogerâs portfolio. Justify your recommendations by describing how your chosen fund best meets both of the stated criteria. (No calculations are required.)

(b) Twenty years later, Roger is meeting with you, his new financial advisor. You are evaluating if Rogerâs investment policy remains appropriate for his changed circumstances.
- Roger is now 75 years old and retired. His spending requirements are expected to increase with the rate of general inflation, which is expected to average 3.0 per cent annually.
- Roger estimates his current living expenses at SGD150,000 annually. An annuity, purchased with the proceeds from the sale of his medical practice, provides SGD20,000 of this amount. The annuity is adjusted for inflation annually using a national price index.
- Because of poor investment performance and a high level of spending, Rogerâs asset base has declined to SGD1,200,000 exclusive of the value of the annuity.
- Roger sold all of his small-cap investment last year and invested the proceeds in domestic bonds.
- Because his international equity investments have performed poorly, Roger has become markedly uncomfortable holding international equities.
-Roger plans to donate SGD60,000 to a charity in three months.

Discuss how each of the following components of Rogerâs investment policy statement should now reflect the changes in his (note that the observations should focus on but not limited to the direction and magnitude of change in each component rather than on a specific numeric change):
(i) Risk tolerance
(ii) Return requirement
(iii) Liquidity needs
(iv) Time horizon

(c) Rogerâs investment portfolio at 75 years old is summarised in Exhibit 3 below:
Current Expected Expected
Allocation Return Standard Deviation
Cash equivalents 2% 5% 3%
Fixed Income 75% 7% 8%
Domestic Equities 10% 10% 16%
International Equities 3% 12% 22%
Domestic Real Estate 10% 10% 17%
_______________________________________________________________
Exhibit 3: Rogerâs Investment Portfolio at Age 75 Years Old

Given Rogerâs changed circumstances, state whether the current allocation to each asset class should be lower, the same, or higher. Justify your response with one reason for each asset class. No calculations are required and responses should be based only on Rogerâs changed circumstances and the information in
Exhibit 3.
(i) Cash Equivalents
(ii) Fixed Income
(iii) Domestic Equities
(iv) International Equities
(v) Domestic Real Estate

(d) Explain one (1) way in which Roger might seek to reduce the tension between his current return requirement and his current risk tolerance.

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FIN 101 Lecture Notes - Lecture 4: Mutual Fund, Cash Flow, Savings Account

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