CERTIFIED FINANCIAL PLANNER

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1 Page 1 of 10 CERTIFIED FINANCIAL PLANNER PROFESSIONAL COMPETENCY EXAMINATION Tear this top page off, read it, sign it and please hand in with your answer booklet Session 2 Four (4) Questions Date: 18 February 2016 Total Marks : 50 Time: 13h00 16h00 (3 Hours) Pass mark : 60% This examination paper comprises of 10 pages. Each case study should be answered in its own booklet. You are expected to fully motivate all your answers, where applicable. Only answers in your own handwriting in the official answer book will be considered. PLEASE READ THE FOLLOWING RULES AND INSTRUCTIONS FOR THE EXAMINATIONS 1 The duration and type of examination is clearly indicated on the coversheet of the examination paper. 2 If you arrive late, no extra time will be allocated to you. No candidate will be allowed to leave the examination room within the first half hour or the last fifteen minutes of the examination session. 3 This is an open book examination. You are allowed to use textbooks, notes, financial calculators and tax tables during the exam. Candidates are not allowed to use cell phones or any other electronic device for whatsoever reason or purpose. Cell phones must be switched off and securely packed away in the candidate s bag. 4 Please use the stickers provided and place a sticker on the top right hand corner of each examination book as this promote anonymity. Also write your ID number on every page of the answering book. Do not write your name on any booklet. Answer each case study in a separate book. Please tear off the first page, sign at the bottom and include in your examination script. 5 No communication of any nature will be tolerated between candidates whilst the exam is in sitting. Candidates who disobey this rule will be expelled from the exam venue immediately. 6 You may not copy from any person during the examination nor allow anybody to copy from you. Any candidate suspected of cheating during the exam sessions will be investigated and may lead to disciplinary action (even if suspected by assessors after you have left the venue). 7 No smoking shall be allowed during the examination and no candidate shall be allowed to leave the examination venue for this purpose. 8 The results of the examination will be available ten (10) weeks after the examination. 9 Should you not be satisfied with the examination process, examination paper or results, you have the right to lay a complaint or appeal the exam in accordance with the PCE Examination policy available on I with ID number hereby acknowledge that I have read and understand all of the above. Candidate signature

2 Page 2 of 10 Case Study 2: 09h00 12h00 (3 Hours) 50 Marks Background Macdonald Max has approached you to assist him with his budget and financial planning. Macdonald is an Information Technology Specialist and runs his business as a sole proprietor. He bills his clients at a fixed monthly rate for services that he renders. His monthly income consists of monthly fees that are contractually payable for a period of 24 months and also consulting fees that are based on an hourly rate. It often happens that some of these payments are made later than the last day of every month (the day on which they are due). This creates cash flow problems. His finances are currently in a terrible state and he does not know how to rectify it. He got divorced in September He lost most of his assets in the start-up of his business and in settlement of his obligations under the divorce order. In addition to assets that he had to transfer to his ex-spouse, he also had to pay her a cash amount of R in terms of the divorce order. Note number 4 provides an explanation as to how this payment was settled. Macdonald is fully committed to getting himself out of debt; he knows that he spends far too much money. His divorce had a major impact on his spending patterns. He knows that he must make lifestyle changes and get his life back on track. For this reason, he requested that you assist him with a plan to sort out his debt, cash flow and provision for income tax. He provided you with the following information: Value of his assets on 31 January 2016 Asset Value Income fund R25 200, but it has a withdrawal value of R Furniture in storage No commercial value His liabilities as on 31 January 2016 were as follows: Debt description Outstanding balance on Monthly payment RAND Credit card (15.5% p.a. - nominal) See note 7 below Business loan (interest 10% p. a.) R6 000 Overdraft (interest 14.5% nominal) See note 2 below Income tax liability on 30 April See note 6 below Amount owing to friend in respect of loan (repayable on 29 February 2016) Total R He received R and repaid an amount of R See Note 1 below.

3 Page 3 of 10 Notes that need to be taken into account: 1. Macdonald borrowed R from his friend Angus on 28 January Macdonald only deposited the cheque into his current account on 1 February The loan therefore did not change the balance of his current account as it stood on 31 January Macdonald repaid his friend an amount of R1 000 on 1 February This payment was made using cash that he had at home on the day. The outstanding balance of the loan is R and must be repaid on 29 February No interest is chargeable on the loan. 2. Macdonald has an overdraft facility of R with his bank. After payment of his monthly expenses at the end of the month he wants an amount of R to be available for cash flow purposes during the coming month. It means that after payment of his expenses only R8 000 of the overdraft must have been used. The amount owing on his overdraft on 31 January 2016 is the balance at the beginning of that day before any transactions (debits and credits) went through the account on that day. 3. He currently contributes R5 000 per month to an Income Fund. The growth rate is 6% per annum (compounded monthly). The value, before his last contribution of R5 000 on 31 January 2016, was R The purpose of this investment is to use the fund for income tax payments as and when they become payable by him. 4. Macdonald s biggest client is T-T Suppliers. In terms of the 24-month contract between them the monthly fee payable by T-T Suppliers is R When Macdonald needed an amount of R on 30 November 2015 to pay his divorce settlement, T-T Suppliers paid him an amount of R by paying 5 months of fees in advance. Normal payment of this fee will commence again as from 30 April Macdonald has undertaken not to use more than R2 000 per month for his personal entertainment. He will withdraw cash from his current account when needed and not use his credit card for this purpose. 6. Macdonald is registered as a Provisional Taxpayer. Assume that his provisional tax for the year of assessment ending 29 February 2016 has been paid in full. He received his income tax assessment for the tax year ending on 28 February 2015 last week. This assessment shows that he owes SARS an amount of R This amount is payable on 30 April Macdonald always tries to pay his credit card in full on the first day of every month. The reason is that if the credit card account is settled in full he will not incur interest. 8. Macdonald is not liable for Value-Added Tax (VAT).

4 Page 4 of 10 His monthly income Macdonald s business income that was received on 31 January 2016 is as follows: Monthly income Amount Paid on 31/01/2016 Notes T-T Suppliers R 0 R 0 See note 4 above. Independent R R Consulting Big Boys R R Bheki Improvements R R 0 Outstanding (not yet received) Keet Holdings R R 0 Outstanding (not yet received) R New contracts Macdonald has entered into 3 new contracts. Two of these will provide him with a fixed recurring monthly income for a period of 24 months and the third with a lump sum and a recurring monthly income. These new contracts will provide the following future income. Once-off (single) payment Date of payment Amount Itrans single payment 29/02/2016 R Recurring monthly payments Date of payment Amount Itrans recurring 31/03/2016 R Amogeleng - recurring 29/02/2016 R Ettien s Marketing 30/04/2016 R recurring Peter Trust recurring 30/04/2016 R Total R Macdonald s monthly expenditure that was paid on 31 January 2016 were as follows: Rand Overdraft Bank fees 384 Interest on overdraft 121 Fixed Business Expenses (his fixed monthly expenses are R but he only paid R The outstanding balance must be paid as soon as he has the money to do so Salaries Instalment on business loan Rental Life insurance premiums Maintenance (ex-spouse and children) Clothing account 700

5 Page 5 of 10 Self-storage (furniture) 770 School fees Short-term insurance Medical scheme contribution Credit card (see note) - Cash withdrawals personal entertainment 500 Income fund investment Partial repayment (friend s loan) Total (credit card excluded) Super Bank Ltd approved and has made the following credit facilities available to Macdonald: Increase his existing Bank overdraft to R at the existing interest rate compounded monthly or; Personal Loan of R at 19.5% (effective - compounded monthly) or; Revolving Credit facility of R at 17.2% (nominal - compounded monthly). Question 1 [14] 1.1 Calculate the income receivable as on 31 January (1) 1.2 Calculate the accounts payable excluding the outstanding balance on the Credit Card as on 31 January 2016 (1) 1.3 Calculate the maximum amount Macdonald that will be able to pay towards his credit card, if we assume that all outstanding income was received on 1 February 2016 as calculated in 1.1. In addition, you must assume that he will take the withdrawal amount from his income fund, keep R available in his overdraft and settle the outstanding balance of the money he borrowed from his friend. What is the maximum total amount that he will be able to pay towards the Credit Card on 1 February 2016? (3) 1.4 Complete the forecasted budget to determine future cash flows. The following must be taken into consideration when completing the budget: (5) In this calculation the expenses are based on a total value of R on 29 February This value includes the credit card, overdraft and business loan payments. It excludes the contribution of R5 000 per month towards the Income Fund. For this calculation the outstanding balance of the credit card and the outstanding balance of the overdraft are settled in full on 29 February 2016.

6 Page 6 of 10 Assume that after settlement of the overdraft and the credit card that Macdonald will not access these credit facilities unless you have been notified thereof. He is committed to paying of his debt as soon as possible. For ease of calculation exclude any interest earned on the remaining cash available to Fund the Tax liability. Therefore, assume that the money is kept in the cheque account with no interest earned thereon. Use the following Format: Monthly Income 29 Feb March 30 April T-T SUPLIERS Determine (1/2) Determine (1/2) Determine (1/2) Independent Consulting R R R Big Boys R R R Bheki Improvements R R R Keet Holdings R6 815 R6 815 R6 815 Itrans R0,00 R R Itrans Lump sum payment of R R R0 R0 Amogelang Consulting R8 300 R8 300 R8 300 Ettien s Marketing R0 R0 R1 200 Peter Trust R0 R0 R2 100 Total Income R R Determine(1/2) Expenses excluding Credit Card, Determine(3 ½) R R Overdraft and Investment Settle outstanding Credit Card R R0 R0 Settle Overdraft R8 000 R0 R0 Other: Investment R5 000 R5 000 R5 000 Cash available to fund Tax Liability Determine(1/2) Determine (1/2) Determine(1/2) 1.5 Determine how much Macdonald must borrow to pay the tax liability of R on 30 April Assume that he will first use the maximum withdrawal value of the Income Fund to minimise his tax liability. Any shortfall thereafter will be funded with a loan. Assume that the income fund will have a maximum withdrawal value of R on 30 April 2016 (1) 1.6 Which one of the three different credit facilities (bank loans) mentioned above will you advise Macdonald to take in order to pay his outstanding tax liability? Compare and then rank the interest rates of the different loans available to him from lowest to highest. (3)

7 Page 7 of 10 Question 2 [18] Two years have passed and Macdonald s business has grown tremendously. Both of you had a beneficial relationship over the years. Macdonald wants to invest directly in the share market. He seeks your advice and guidance. A decision has to be made between three different companies in the same sector. However he does not know which one to choose and he provides you with the following information. Risk Measurement/Information Company A Company B Company C Issued Shares Net profit attributable R R R to ordinary shareholders Current Market asking price cents cents cents Standard Deviation PE Ratio 5? 4 Expected return 18.3% 13.2% 15.5% Future EPS cents cents? Coeffient of Variation? 1.02? Expected Growth rate of Net Profit 8.2% 8.9% 8.3% Expected future Earnings Yield 21.64%?? 2.1 Calculate the future EPS for Company C (2) 2.2 Calculate the PE Ratio for Company B (2) 2.3 Calculate the expected Future Earnings Yield of Company B and of Company C (2) 2.4 Calculate the Coeffient of Variation for Companies A and C (2) How much must Company B s return be for the Coeffient of Variation to be equal to Company A and C s? (2) 2.5 Calculate what company B s dividend per share must be to justify a share price of R It is assumed that the dividends will grow at the same rate as the growth rate of Net Profit, and the Expected return of 13.2% can be used in the calculation. (1)

8 Page 8 of Calculate the Present Value of Company A and C if both pay a dividend of R155 per share, using expected growth rate of net profit for dividends and the expected return provided for each company (2) 2.7 Which share would you advise Macdonald to invest in when taking all the above into consideration? (1) 2.8 In order for an FSP and/or a representative of and FSP to provide advice and deliver intermediary services on shares; what FAIS licensing category must an FSP/representative be licenced for and what is the period he/she must work under supervision for the said FAIS licensing category? (2) 2.9 Considering the current economic environment in South Africa what risks must the client take into consideration before investing in the shares mentioned by you in your answer in 2.7 above? (2) Question 3 [7] On 1 February 2016 Macdonald, aged 42, won R on the National Lotto. He requires that you guide him with the investment of his money in the most tax efficient way. Macdonald has no investments at this stage and currently does not make use of any tax concessions in respect of investment income (deductions and exemptions) available to him. Your strategy must be based on the following; use the maximum tax deductions and exemptions available, pay off debt and invest the remainder in an equity portfolio. You must calculate the maximum amount that can be used to invest his money in an equity portfolio. The following information must be taken into consideration: Ignore all the information provided or calculated in the previous questions. Specific reference and structure of the investment must be as tax efficient as possible. Macdonald is a self-employed taxpayer and pays tax at a rate of 32% Macdonald s non-retirement funding employment income for the year of assessment ending on 29 February 2016 is a salary of R (he did not make contributions to any retirement funds). Trusts must be excluded from your advice. Use the tax legislation and tax rates for the year ending 29 February 2016.

9 Page 9 of 10 No money is to be invested in a voluntary purchased annuity. No investments are to be made in Bonds or any other interest-bearing instruments except in a Money Market Account with his Bank at a rate of 4.8% pa. Macdonald is a South African resident Macdonald will invest R in an equity portfolio 3.1 Complete the outstanding information in the table below to indicate the reasoning behind your advice before investing the remainder in the equity market. (5) Type Amount to invest Implications on income tax Repayment of Debt R No implication Tax Free investment (1) (1) Money Market R (1) Retirement Annuity (1) (1) Equity Portfolio R Local dividends earned are 100% exempt in the hands of tax payer. 3.2 You determined that Macdonald made a capital gain of R for the tax year ending on 29 February Calculate the capital gains tax payable by him (1) Macdonald has earned local dividends of R during the current tax year and wants to pay an additional portion of the dividends he earned during the year into his Retirement Annuity Fund. With how much will his Retirement Annuity deduction increase? (1) Question 4 [11] Mr. Abrahams is one of your new clients. His wife tragically passed away on 21 December He approached you for assistance, as his previous planner, Mr. Coertzen is ignoring all his phone calls. His previous planner is a CERTIFIED FINANCIAL PLANNER professional and a voting member of the Financial Planning Institute of Southern Africa NPC (the FPI). You are also a CFP professional. It would appear that Mr. Coertzen replaced Mr and Mrs Abrahams life cover; he cancelled the initial policy (which Mr. Coertzen wrote for the Abrahams two years ago) with effect from 1 December 2015 and the new policy only commenced 1 January The replaced/initial policy was ceded collaterally to AFBA bank as security against a home loan in Mrs. Abraham s name.

10 Page 10 of Considering the scenario above, what do you think, in simple terms, is the result of Mr. Coertzen actions? (1) 4.2 Mention any recent FAIS Ombud determination that is similar to the above scenario? (1) 4.3 Referring to the determination mentioned in your answer in question 4.2 above, mention at least three (3) paragraphs of the code 1 the respondent breached? (3) 4.4 What is the difference between section 8 (1) (d) of the GCOC and ASISA s code on replacements as far as enforcement is concerned? (2) 4.5 With regards to replacements, what is the difference/update between the original Proposal OO in RDR (published on 7 November 2014) and the Status Update: RDR Phase 1? (4) THE END of CASE STUDY 2 50 MARKS 1 General Code of Conduct for Authorised Financial Services Providers and Representatives (GCOC)