Laura Smith, 35 years old, is a lawyer in the office of the Attorney General Alberta. Her husband, Stephen Smith, 32 yea
Posted: Wed Jul 06, 2022 6:41 pm
Laura Smith, 35 years old, is a lawyer in the office of theAttorney General Alberta. Her husband, Stephen Smith, 32 years old,is a car salesperson. They adopted twins, Faith and Gaia, at ageone, three years ago. They do not plan to have more children.
Laura earns $85,000 per year with $51,000 of that beingtake-home pay. Her deductions provide full family health coverage(medical, drugs, dentist, optical) with $100 deductible per familymember each year. She has disability insurance for 70% of hersalary and three times her salary in life insurance. Her marginaltax rate is 40%. She is good at her job, and well regarded by hersuperiors. She already works some long hours, staying late somenights and taking work home on weekends. To move up in theorganization, she would have to work even more hours, and sherefuses to sacrifice her family.
Stephen’s commission income is quite variable, ranging from$25,000 to $60,000 in recent years. Last year he grossed $60,000for the year, with a take-home pay of $42,000. He has no benefits.Unlike many commission salespersons, he has no significant expensesthat are not covered by the dealership. He expects he will make$55,000 to $60,000 next year. His job is fairly secure as long asthe dealership doesn’t fail. The owners of the dealership arefairly conservative and he thinks they are in good financial shape.Stephen usually works one day on the weekends, and one or twoevenings a week, but also takes one weekday off. His marginal taxrate varies but it was 30% last year.
The house is in good shape and is located in a nice neighborhoodin Edmonton, two kilometers from the Government building whereLaura works and four kilometers from Stephen’s job. They justrenewed the mortgage for five years at 6.45% with a 20-yearamortization. Their current mortgage payments are $1,950 permonth. They spent $4,000 on taxes and utilities last year,and $2,000 on maintenance and insurance.
Other than the items already noted, they used cheques and cashwithdrawals from the chequing account to pay another $12,000 ofexpenses last year. Food, groceries and take-out food orders werethe biggest item but they aren’t sure what else was included.
They used several other credit cards for a total of $22,000 lastyear. This included clothing, household purchases, furniture,entertainment, life insurance and vacations. They take two or threeholidays per year. Last year they spent one vacation in Hawaii(without children), one week at Whistler ski resort, and a weekcamping.
They own two cars. Laura has a 2021 Toyota Sienna, which shepaid for $36,000 that will last for perhaps five more years.Stephen drives a relatively a 2003 Cadillac CTS loaded with all theextras. He got it for only $30,000 originally because he works fora GM dealer. He expects to replace it with a Cadillac CT-4 thisyear.
The balance shown is the current amount owing. They spent about$8,000 last year on gasoline, maintenance, insurance and licensesfor the cars, all charged on one credit card
They have a housekeeper who does the cleaning, a bit of shoppingand cooking, and looks after the children. Gaia and Faith willstart half-day kindergarten next year. The housekeeper lives in aself-contained apartment with a separate entrance at the side ofthe house. Her salary and benefits cost $20,000 p.a. On thehousekeeper’s tax form (T4 slip) they report a taxable benefit of$500 per month for the apartment she occupies. They expect toretain a housekeeper until the children are 12, and then switch toa cleaning service for $150/week. They can’t do withouther now, because of their inflexible working hours.
Stephen has a $100,000 term life insurance policy; he currentlypays $25 per month for the policy. The securities are a portfolioof oil exploration companies (listed on the TSX Venture Exchange).They pay no dividends but they increased in value by 20% lastyear.
They have a lot of trouble saving money. They bought thesecurities before the twins arrived. Their credit card debt hasincreased in each of the last three years. They don’t keep detailedaccount of their expenses but they have sorted them out a bit byusing different credit cards and the chequing account for differentthings.
They want to retire around the time they turn 60. If Laura stayswith the government, she will have a pension in today’s dollars of$45,000 before-tax, including both her employer and Canada PensionPlan. Stephen will qualify for the maximum Canada Pension Plan.
They would like to maintain a similar lifestyle in retirement.They are concerned about the possibility that their pension planswill be reduced by government cut-backs or tax claw-backs. Theyhave read that there is some risk that the government won’t be ableto pay full Canada Pension Plan in the future because it hasn’tbeen sufficiently funded and the population of retirees is growingrapidly.
They also want to buy a vacation property in a few years, whentheir current debts are more manageable. They are thinking ofsomething in the Foothills, in the $250,000 range. They mightretire to it and sell the house in Edmonton but it’s too far in thefuture to be more than an idea.
Here is a list of assets and liabilities that Stephen and Lauraprovided to you, the value is to the best of their abilities.
Laura and Stephen Smith
Balance Sheet December 31, Last Year
ASSETS Liabilities
Chequingaccount $1,000 Current Credit cardbalance $4,000
Car savingsaccount 8,000 Credit card debt at 21% 7,000
Securities 6,000 Carloan 15,000
Two cars, originalcost 66,000 Mortgage onhouse 260,000
House, currentmarket 400,000
TOTALASSETS $491,000 TOTAL LIABILITIES $286,000
Instructions: Act as an advisor to Laura andStephen.
In your analysis and review, your report should contain thefollowing:
(30 Marks):
Note: Evaluate currentsituation for the Smith’s using the financial ratios
Laura earns $85,000 per year with $51,000 of that beingtake-home pay. Her deductions provide full family health coverage(medical, drugs, dentist, optical) with $100 deductible per familymember each year. She has disability insurance for 70% of hersalary and three times her salary in life insurance. Her marginaltax rate is 40%. She is good at her job, and well regarded by hersuperiors. She already works some long hours, staying late somenights and taking work home on weekends. To move up in theorganization, she would have to work even more hours, and sherefuses to sacrifice her family.
Stephen’s commission income is quite variable, ranging from$25,000 to $60,000 in recent years. Last year he grossed $60,000for the year, with a take-home pay of $42,000. He has no benefits.Unlike many commission salespersons, he has no significant expensesthat are not covered by the dealership. He expects he will make$55,000 to $60,000 next year. His job is fairly secure as long asthe dealership doesn’t fail. The owners of the dealership arefairly conservative and he thinks they are in good financial shape.Stephen usually works one day on the weekends, and one or twoevenings a week, but also takes one weekday off. His marginal taxrate varies but it was 30% last year.
The house is in good shape and is located in a nice neighborhoodin Edmonton, two kilometers from the Government building whereLaura works and four kilometers from Stephen’s job. They justrenewed the mortgage for five years at 6.45% with a 20-yearamortization. Their current mortgage payments are $1,950 permonth. They spent $4,000 on taxes and utilities last year,and $2,000 on maintenance and insurance.
Other than the items already noted, they used cheques and cashwithdrawals from the chequing account to pay another $12,000 ofexpenses last year. Food, groceries and take-out food orders werethe biggest item but they aren’t sure what else was included.
They used several other credit cards for a total of $22,000 lastyear. This included clothing, household purchases, furniture,entertainment, life insurance and vacations. They take two or threeholidays per year. Last year they spent one vacation in Hawaii(without children), one week at Whistler ski resort, and a weekcamping.
They own two cars. Laura has a 2021 Toyota Sienna, which shepaid for $36,000 that will last for perhaps five more years.Stephen drives a relatively a 2003 Cadillac CTS loaded with all theextras. He got it for only $30,000 originally because he works fora GM dealer. He expects to replace it with a Cadillac CT-4 thisyear.
The balance shown is the current amount owing. They spent about$8,000 last year on gasoline, maintenance, insurance and licensesfor the cars, all charged on one credit card
They have a housekeeper who does the cleaning, a bit of shoppingand cooking, and looks after the children. Gaia and Faith willstart half-day kindergarten next year. The housekeeper lives in aself-contained apartment with a separate entrance at the side ofthe house. Her salary and benefits cost $20,000 p.a. On thehousekeeper’s tax form (T4 slip) they report a taxable benefit of$500 per month for the apartment she occupies. They expect toretain a housekeeper until the children are 12, and then switch toa cleaning service for $150/week. They can’t do withouther now, because of their inflexible working hours.
Stephen has a $100,000 term life insurance policy; he currentlypays $25 per month for the policy. The securities are a portfolioof oil exploration companies (listed on the TSX Venture Exchange).They pay no dividends but they increased in value by 20% lastyear.
They have a lot of trouble saving money. They bought thesecurities before the twins arrived. Their credit card debt hasincreased in each of the last three years. They don’t keep detailedaccount of their expenses but they have sorted them out a bit byusing different credit cards and the chequing account for differentthings.
They want to retire around the time they turn 60. If Laura stayswith the government, she will have a pension in today’s dollars of$45,000 before-tax, including both her employer and Canada PensionPlan. Stephen will qualify for the maximum Canada Pension Plan.
They would like to maintain a similar lifestyle in retirement.They are concerned about the possibility that their pension planswill be reduced by government cut-backs or tax claw-backs. Theyhave read that there is some risk that the government won’t be ableto pay full Canada Pension Plan in the future because it hasn’tbeen sufficiently funded and the population of retirees is growingrapidly.
They also want to buy a vacation property in a few years, whentheir current debts are more manageable. They are thinking ofsomething in the Foothills, in the $250,000 range. They mightretire to it and sell the house in Edmonton but it’s too far in thefuture to be more than an idea.
Here is a list of assets and liabilities that Stephen and Lauraprovided to you, the value is to the best of their abilities.
Laura and Stephen Smith
Balance Sheet December 31, Last Year
ASSETS Liabilities
Chequingaccount $1,000 Current Credit cardbalance $4,000
Car savingsaccount 8,000 Credit card debt at 21% 7,000
Securities 6,000 Carloan 15,000
Two cars, originalcost 66,000 Mortgage onhouse 260,000
House, currentmarket 400,000
TOTALASSETS $491,000 TOTAL LIABILITIES $286,000
Instructions: Act as an advisor to Laura andStephen.
In your analysis and review, your report should contain thefollowing:
(30 Marks):
Note: Evaluate currentsituation for the Smith’s using the financial ratios