CASE 1 (9 pages)

PERSONAL FINANCE - FINA200

Fall 2019, Section EC
Case 1: October 10, 2019 (due October 17, 2019 before 11:59pm)
Covering Chapters 1 - 7
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Student Name: Christopher Chave Student ID:40085558

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PLEASE NOTE INSTRUCTIONS BELOW

-Write your name and student ID above.
-Save the file to upload as: last name plus student number (example: Parla855555) – note: the file
name will automatically change to a numbered file once uploaded, this is normal.
-This is an individual assignment, to be completed by you alone.
-There are 9 pages to this case including the cover page – please ensure that you have all 9 pages.
-Case 1 consists of two sections. Answer:
Section I: respond directly on the Case and highlight your response to the
multiple-choice questions.
Section II: respond directly on the Case in the space provided for each Mini-
Case question.

-You may submit your solution in English or French; acceptable submission formats include Word
(.docx or.doc) or PDF. EXCEL is NOT accepted.

-All responses with calculations are to two decimal places.

-Tables can be found at the end of the Case to help respond to tax and Time Value of Money (TVM)
questions. Outside research/sources will be required.

This Case is on 20 marks; it is worth 10% of your grade.

For marking purposes only:
Multiple Choice Mini-Case A Mini-Case B Mini-Case C Mini-Case D Mini-Case E Total

/6 /1 /7 /3 /2 /1 /20

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Section I: Six (6) Multiple-Choice Questions (6 marks - 1 mark each)
Highlight your response.

1) Ali just graduated from Concordia and started his first job. He could have participated in the
company’s retirement plan as of his first day on the job but believes that retirement is too far
away to think about (he is only 23 years old). He therefore decided not to participate in the
company offering, even if the company would have matched his $300 monthly contribution.
Assuming that Ali were to retire at age 60, how much would have accumulated in his retirement
plan if the plan averaged an annual return of 7% interest compounded monthly?
a) $1,329,321
b) $1,628,964
c) $1,325,980
d) $1,257,927
e) $1,422,765

2) Samantha regularly forgets to pay her monthly bills and loan repayments. This negligence is
costly. Show Samantha that although her VISA credit card’s advertised interest rate is 29.9%,
the effective interest rate, compounded daily is really ______________. (round to two decimal
places using 365 days per year)
a) 33%
b) 35%
c) 36%
d) 34%
e) 39%

3) Joel did not have any money in April 2019 to pay the taxes owing of $5,000 on his 2018 Federal
Personal Income Tax Return. He decided to wait until he receives his bonus on November
1,2019. He knows that the Canada Revenue Agency (CRA) charges compound daily interest
starting May 1, 2019, on any unpaid amounts owing. He also heard that CRA will also charge a
penalty for not filing by April 30th. Calculate Joel’s penalty, as of November 1, 2019, the date
that he will file and pay (ignore interest charges).
a) $255
b) $300
c) $2,500
d) $550
e) $2,250

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 4) Henri graduating from Concordia four years ago. He has been very successful and works for a
top Artificial Intelligence (AI) company in Montreal. His salary alone puts him in the top marginal
tax bracket. He just received his annual bonus of $100,000. What are the 2019 taxes payable
on this bonus? (see Table A)
a) $46,690
b) $53,310
c) $5,331
d) $51,331
e) $45,332

5) Mac is ready to purchase a home requiring a $250,000 mortgage. He is considering two options:
the monthly payment of $1,314 on a mortgage amortized over 25 years at a fixed rate of 3.99%,
compounded semi-annually, or the monthly payment of $1,844 on a mortgage amortized over
15 years at the same fixed rate. What is the difference in the total interest paid between the
two different maturities? (Note, assume that the fixed rate of 3.99% does not change over the
entire mortgage amortization period.)
a) $62,280
b) $81,920
c) $144,200
d) $331,920
e) No difference.

6) Pre-approval certificate is ______________________________.

a) a guideline on how large a mortgage you can afford.
b) the approval for a mortgage.
c) a conventional mortgage.
d) the requirement for mortgage default insurance.
e) an evaluation for different amortization models.

Section I completed, continue to Section II.

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Section II: Six (6) Mini-Cases (14 marks)
Please write (or highlight, where required) your response in the template or space
provided.

Mini-Case A: (1 mark)
Nicole is 20 years old. Nicole adores her Aunt Julia who just turned 90. She knows all about the difficult
life her aunt had growing up under very poor circumstances which is why, still today her aunt hides all
her money around the house and pays for everything in cash. Nicole was however shocked to hear that
her favourite cash-rich aunt had difficulty getting into a private nursing home as her credit score was
so poor. Explain the reason for the aunt’s credit score.
Nicole’s Aunt Julia has a bad credit score because she has a very limited/no credit history.
Because her Aunt makes all of her purchases with cash, her Aunt Julia doesn’t meet any of the
standard criteria that banks use to calculate an individual’s credit score. Such as, Payment history, her
amount of credit owing, length of credit history and type of credit used etc. Because her aunt doesn’t
engage in any sort of payments using a line of credit, her credit score is greatly affected for the
worse. Even though she has the liquid assets to get into the private nursing home.

Mini-Case B: (7 marks-1 mark each)

Simone lives on her own. She is currently renting but is ready to purchase her first home. As she knows
that you are taking a Personal Finance course, she has turned to you for guidance before approaching
the banks for a mortgage. Her monthly living expenses are $3,700.

Description Fair Market Value

Chequing account $3,500
Furniture $9,750
Car $23,500
Registered Retirement Savings Plan (RRSP) $111,650
investments: (Stocks)
Savings Account $5,750
Cash $50
Investments: Mutual Funds (bonds) $7,000
Student loan (3 years remaining) $12,000
Car loan (4 years remaining) $15,550
Furniture loan (5 months remaining) $4,175
Credit card balance (unpaid balance after $1,600
monthly minimum paid)

a) What is the value of her Liquid Assets? (1 mark)

Calculation: (1 mark) Chequing account + Savings account + Cash = Liquid Asset
3500 + 5750 + 50 = $9300 Liquid Assets

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 b) What is her Current Ratio? (1 mark)
Calculation: (1 mark) Liquid assets / Current liabilities = Current Ratio
Liquid assets/ (unpaid credit card balance + Furniture loan) = Current Ratio
(3500 + 5750 + 50) / 1600 + 4175 = Current Ratio
9300 / 5775 = 1.6103 Current Ratio

c) What is her Net Worth? (1 mark)

Calculation: (1 mark) Value of total assets – Value of total liabilities = Net Worth
(Chequing account + Furniture + Car + RRSP + Savings account + Cash + Mutual fund) – (Student
loan – Car loan – Furniture loan - Credit card balance) = Net Worth

(9750 + 23500 + 3500 + 111650 + 50 + 7000) – (12000 + 15550 + 4175 + 1600) = Net Worth
(161200) – (33325) = 127875$ Net Worth

d) What is her Liquidity Ratio? (1 mark)

Calculation: (1 mark) Liquid Assets / Monthly living expenses = Liquidity Ratio
(Chequing account + Savings account + Cash) / (Monthly expenses) = Liquidity Ratio

(3500 + 5750 + 50) / 3700 = Liquidity Ratio

9300 / 3700 = 2.5135 Liquidity Ratio

e) Simone’s home that she is looking to purchase is on the market for $200,000. This is a good
price, in a hot market. She knows that the home will sell fast and will sell for the asking price.
How much would Simone need for a down payment on the home if she were to take a
conventional mortgage? (1 mark)
Calculation: (1 mark)
Conventional mortgage percentage x Price of house = Down Payment
0.20 x $200000 = Mortgage down payment
= $40000 Down Payment

f) If Simone wanted to take advantage of the Home Buyer’s Plan (HBP) in November 2019, what
is the maximum amount that she could withdraw from her Registered Retirement Savings Plan
(RRSP)? (You will need outside research for the 2019 amount. Hint: the amount under the HBP
increased in March 2019, it is no longer $25,000). What is the minimum RRSP repayment
amount required under the HBP that Simone must make? (1 mark-.5 mark each)
Response: (.5 mark)
The maximum amount that would be allowed to be with-drawled for the (HBP) is $35000.
According to

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 https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-
plans/what-home-buyers-plan.html
Calculation: (.5 mark)
Minimum RRSP repayment would be 2333.33$ per year for 15 years
(if she takes out the full $35000 / 15 years = 2333.33$ minimum annual payments.)

g) If Simone only provides the HBP amount as a down payment, she would (have or not have)
_______NOT HAVE _______a conventional mortgage and would therefore (require or not
require) ___________REQUIRE________ default insurance. (Highlight the correct responses.)
(1 mark-.5 mark each)

Mini-Case C: (3 marks-1 mark each)

We are currently October 10, 2019 and Aaron just turned 17 year’s old. He has been working part-time
in his father’s company since he was 16 year’s old. Last year he made $20,000 as a gross annual salary
and received a small refund when he filed his 2018 tax return. Aaron does not know anything about
Registered Retirement Savings Plans (RRSP’s) or Tax-Free Savings Accounts (TFSA’s). Before going to
the bank tomorrow to make his first contribution, he wanted your guidance. Aaron is unsure as to what
he should do.

a) Which plan can Aaron contribute to? Highlight the correct response. (1 mark)
Registered Retirement Savings Plan (RRSP)
Or
Tax-Free Savings Plan (TFSA)
Or
Both

b) What is the reason for your choice? (1 mark)

Because Aaron is only 17 years old, is unelidable to contribute to a TFSA because the
requirements to contribute to a TFSA is that he needs to be 18 years old. However, there
are no age restrictions for Aaron to contribute to an RRSP. So, going into the bank, I would
suggest to Aaron that he only contribute to an RRSP. Once he turns 18, he could then
return to the bank to contribute to a TFSA.

c) In the plan that you have highlighted, how much can Aaron contribute now? (1 mark)
Calculation: (1 mark)
RRSP contribution limit is 18% of your total income earned in the previous year.
Aaron’s last year annual earnings x 18% = Total contribution room.
$20000 x 0.18 = $3600 Contribution Room into an RRSP

Mini-Case D: (2 marks-1 mark each)

Dany has struggled financially as he is a big spender. He is looking to develop a financial plan.

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 a) What are the six steps involved in developing a financial plan? (1 mark)
The 6 steps behind a financial plan are as follows.
STEP 1) Establish financial goals or S.M.A.R.T. goals. It is also important to consider when you would
like to achieve these goals. Such as, whether you would want to achieve them in a short term,
medium term or long-term period.
STEP 2) Consider your current personal financial situation. In essence, how much money you have
in savings, investments and your overall net worth.
STEP 3) Identify and evaluate alternative plans that could achieve your goals. Thusly, once you have
established and identified your current financial goals and financial position. You will then review
multiple plans that will help you reach your goal and meet your financial needs. Such as how much
spending you will need to cut back on in order to achieve your goal. As well as, how frequently you
will need to invest into your financial plan to reach your goal. Along with measuring the advantages
and disadvantages of each plan.
STEP 4) Select and implement the plan that will help you achieve your financial goal. Out of all the
different plans that you had established in the previous step, you will then pick one that best suits
your spending habits and then implement those goals to the best of your ability.
STEP 5) Evaluate the financial plan that you have chosen. Has your plan made you any closer to
reaching your financial goal? If so, continue with your plan. If not, identify the areas that didn’t work
for you and think of ways that can be improved.
STEP 6) Revise your financial plan and implement the changes. Change the areas of your plan that
didn’t work for you and implement those changes to better suit your financial goal. For example,
contributing more money each pay towards your financial plan, or contributing less to better suit
your spending habits. You may also want to evaluate whether your financial plans have changed or
stayed the same. That would also give reason to make alterations to your financial plan.

b) It is currently October 10, 2019 and Dany wants to go on vacation with you next year. He knows
that he needs to set SMART goals if he wants to attain this vacation goal. He does not want to
find himself saying, “I wish I had…” so he has asked for your help as you are great in setting
goals and in attaining them. Help Dany by completing the 4 remaining letters in the SMART
acronym. (1 mark)
S: Upon graduation in December of 2020, Dany will be vacationing in Thailand
for three weeks.
M: Dany will need $3000 (or whatever the cost may be) by December of 2020 in
order to fully pay for his vacation. Dany makes $15000 annually from his part
time job. Thusly, he receives $550 bi-weekly. He will need to budget his annual
income over the next 13 months in order to achieve this goal. Dany’s monthly
expenses are 350$/month for his rent and electricity.
A: What Danny has planned to do in order to meet his financial goal is to put
away a little bit of money from each paycheck in order to contribute for his trip.
Dany is payed $550 bi-weekly from his part time job. Dany is prepared to put
away $120 from each paycheck towards his financial goal. If Dany follows this
regiment for the full 13 months, he will have the desired amount of 3000$ to go
on his trip.
R: Because Dany is going to school, he is only able to work part-time during the
school year. However, when school is finished for the summer, he will be able to
work more hours at his job. Potentially even full-time for 3 months (June, July,
August). This means that his income will increase from $550 to $1000 in the
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 summer. So, an alternate solution that Dany could follow Is only contribute 80$
of his paycheck during the time he is in school, and then contribute more in the
summer while he is working full time. From the $1000, Dany is willing to
contribute $250 from his paycheck towards his vacation. If he follows this
alternate method, he will have enough saved for his trip.
T: Based on the timeframe that Dany has to save for his trip, this is a Medium-
term goal because he will be planning to save over the course of the entire year
for his trip.

Mini-Case E: (1 mark)
Elena is looking to save $1,000 at the beginning of each month starting in 3 years time once she has
graduated from Concordia. Her investments will earn 4%, compounded monthly. What will be the
value of her investments in 12 years’ time?

Calculation: (1 mark) Using the BA 2 plus

Set calculator to the Beginning setting before plugging in to financial calculator.
BGN
P/Y = 12.00
C/Y = 12.00

PMT = 1000.00
PV = 0.00
I/Y = 4.00
N = 108.00
Compute these values into the financial calculator.

FV = 130173.95
The final value of Elena’s investments in 12 years’ time will be $130173.95

The End

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 TABLE A
2019 Combined Federal and Quebec Personal Income
Tax Brackets and Tax Rates

2019 Taxable Income 2019 Tax Rates 2019 Taxable Income 2019 Tax Rates

first $43,790 27.53% over $95,259 up to $106,555 45.71%

over $43,790 up to $47,630 32.53% over $106,555 up to $147,667 47.46%

over $47,630 up to $87,575 37.12% over $147,667 up to $210,371 49.97%

over $87,575 up to $95,259 41.12% over $210,371

TABLE B
2019 Federal Basic Personal Amount and Quebec Basic Personal Amount

2019 Federal Basic Personal Amount 2019 Quebec Basic Personal Amount

$12,069 $15,269

Tax rate 15% Tax rate 15%

TABLE C
Tax-Free Savings Account (TFSA): Annual Limits

Years Annual Limit Years Annual Limit

Year started 2009 - 2012 $5,000/year 2016 - 2018 $5,500/year

2013 - 2014 $5,500/year 2019 $6,000/year

2015 $10,000/year

TABLE D
Registered Retirement Savings Plan (RRSP): Annual Limits

Year Contribution limit

2014 $24,270
2015 $24,930
2016 $25,370
2017 $26,010
2018 $26,230
2019 $26,500

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 TABLE E
Time Value of Money Formulas

Simple Interest

Future (FV) of a single dollar amount

Present Value of a single dollar amount

Future Value of an annuity

Present Value of an annuity

Interest Rate Conversion

Time Value: Simple interest:

FV = Maturity value or Future value I = Interest earned

PV = Principal or Present value P = Principal or Present Value

PMT = Periodic annuity payments r = annual interest rate

t = time (in years)
n = Number of compounding periods per year
i = Annual interest rate
t = Time (in years)
EY = Effective yield

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