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1 FINA200 Winter 2011, Section W Case 2 - d...




1 FINA200 Winter 2011, Section W Case 2 - due Wednesday, March 9, 2011 Covering Chapters 5 - 8 _______________________________________________________ PLEASE NOTE ? THIS IS AN INDIVIDUAL ASSIGNMENT. ? YOU MAY SUBMIT THIS ASSIGNMENT IN MICROSOFT WORD 2007 (.docx), MICROSOFT WORD (.doc), MICROSOFT WORKS (.wps), PLAIN TEXT (.txt) OR WORD PERFECT (.wpd). ? PLEASE DO NOT SUBMIT YOUR ASSIGNMENT IN EXCEL. ? GO TO ASSESSMENT/CASE SUBMISSIONS AND UPLOAD THE FILE TO SUBMIT YOUR ASSIGNMENT. ? PLEASE QUOTE ALL SOURCES AND DO NOT COPY AND PASTE! _______________________________________________________ Chance and Peter are soon to celebrate their 5th wedding anniversary. They have a couple of very specific financial goals - one is to celebrate their wedding anniversary with a return trip to Europe. The other is to buy their first home later this year (2011). Their combined gross income is $100,000. Overall, approximately 40% of their gross pay is deducted to cover federal and provincial taxes, along with employment benefits. From their disposable income, they set aside $500 monthly in RRSP contributions and pay approximately $1,000 a month for rent, electricity and heating. They also make payments against their debt which is structured as follows: ? Chance borrowed $10,000 on a line of credit 12 months ago to purchase a used car. She is required to reduce the balance of the loan by 1% per month, along with paying the monthly interest of 0.5%. ? Peter transferred a $20,000 balance owing on his educational line of credit to an installment loan charging 9% per annum, compounded monthly 2 three years ago. He has made regular monthly payments since then. The original term of the loan was 10 years. The couple manages their cash flows very closely. In addition to the $20,000 combined balance of their RRSPs, they have $15,000 in a TFSA deposit and $10,000 in a self-directed non-registered investment account. Aside from $3,000 they have earmarked for their anniversary trip, they would be willing to liquidate both the TFSA and investment account to make a down payment on a home. This would be in addition to the maximum withdrawal under the Home Buyers' Plan. Question 1 (10 marks) What is the balance of Chance's line of credit and Peter's education loan? Please show all calculations. Question 2 (10 marks) Assume that their financial institution applies a GDS of 30% (excluding heating and insurance) and a TDS of 40% (excluding heating and insurance). Given an estimated $300 in property taxes, what is the most they could pay each month for a mortgage use both ratios? Presume the mortgage term would be 25 years and charge 0.45% per month in interest. (Hint: Calculate next month's charge for Chance's line of credit and use this amount to estimate her required monthly debt payment.) Question 3 (35 marks) Chance and Peter are looking at homes in St-Basile-le-Grand. In this community, the average home is $250,000 with property taxes of approximately $300 a month. If they take out the maximum loan under the Home Buyers' Plan and empty their TFSAs and investment account except for their vacation funds, what will be the monthly cost of a home in 2012 and 2013? Make the following assumptions to simplify your analysis. (Research is required - please state your sources.) ? They will opt for a 25-year mortgage at a 0.45% monthly rate of interest. ? Home acquisition costs, excluding the land transfer tax, will amount to $10,000. 3 ? They will pay the land transfer tax and home acquisition costs outright, but will add the cost of insuring their mortgage with CMHC to the balance of their loan. ? They will make the minimum legal repayments to the Home Buyers' Plan when required. ? Their home insurance will be $60 a month, up $30 from the cost of their tenants' package. ? The First Time Home Buyers' federal tax credit will be received monthly in 2012. ? Their heating and utilities will amount to $200 a month. Question 4 (15 marks) In your estimation, would they be able to afford the home under the terms described? Please support your answer with calculations and refer to the GDS ratio, TDS ratio and their monthly cash flow. With respect to the latter, calculate how much they would have available each month for variable expenses currently, as tenants, and as homeowners. Question 5 (10 marks) Identify two major omissions in their analysis. Please explain. Question 6 (20 marks) The couple's home insurance costs will rise. Explain the meaning of each of the following, and how the couple can overcome the restriction that it creates. ? Named perils ? Co-insurance clause of 80% and escalating replacement costs ? High premium cost due to low deductible of $500 ? Cap on insurance coverage for electronic equipment


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