Case - Devendra Today is Aug 29, 2009. Devendra and Sandhya Pathak have come to you, a Financial Planner, for help in developing a plan to accomplish their financial goals. From your initial meeting together, you have gathered the following information: Devendra Pathak, aged 35 years is employed as an engineer in a rapidly growing firm and is posted in Bangalore. He has been employed with this company since July 1, 2000. Devendra has tremendous potential and is sure of a fast rise in his career. Sandhya Pathak, aged 32 years is currently employed as a florist for a medium sized Horticulture company. She is aiming for higher education in this field, and afterwards plans to start her own business. Their son Harry was born on January 10 th 2005. Devendra s Parents: Balchandar Pathak and Manorama are well off financially and live independently in Nagpur. Devendra and Sandhya are at present drawing monthly salary of Rs. 45,000 and 28,000, respectively, which is expected to increase at the rate of 10% p.a. (They get yearly increment: 1 st Aug of each year for Devendra and from 1 st April each year for Sandhya). Average monthly Household expenses including house rent is Rs. 40,000 which is subject to inflation. Devendra plans to retire when he attains 55 years of age. Devendra bought a term Insurance policy with sum assured of Rs. 25 Lakh in the year 2004 and he has been paying an annual premium of Rs. 6,375 towards this. He has also taken a floater medical Insurance policy for sum assured Rs. 5 Lakh for his family for the annual premium of Rs. 11,575. Sandhya bought a ULIP policy on 29-08-2005 on her 28 th birthday for an annual premium of Rs. 42,000. The policy term is 15 years. She has opted for a life cover of Rs. 10 lakh @ Rs.2.55 per thousand sum assured fixed for the whole term, Accidental Cover of Rs. 5 Lakh @ Rs. 0.50 per thousand of sum assured fixed for the whole term and Critical Illness Benefit Rider of Rs. 2 lakh @ Rs. 3.55 per thousand sum assured under this policy. Policy Charges are as follows: Premium Allocation Charges : 15% first year; 5% second year; 5% third year; 2.5% fourth year onwards Policy Charges (Fixed) : Rs. 720 p.a. Fund Management Charges : 1.2% p.a. Accidental Benefit Rider : Rs. 0.50 per thousand All charges, except fund management charges, are deducted upfront (begin of the year). Fund Management Charges are at the end of the year. Devendra has recently invested in an upcoming housing project in suburban Bangalore in a flat worth Rs. 33 lakh of which Rs. 3 lakh down payment has been made on 1st August 2009 and balance Rs. 30 Lakh is payable by taking a loan from Bank. Payment to the Builder is to be made in parts after specified intervals: Of the total loan amount, 20% to be paid as First installment on 31 October, 2009, 40% to be paid as Second installment on 31st January, 2010 and 40% to be paid as final installment on 31st October, 2010 when the possession can be taken. The loan has to be arranged in such a way to pay the installments when scheduled. 1
STATEMENT OF FINANCIAL POSITION As on July 31, 2009 LIABILITIES Rs. ASSETS Rs. 1. Credit Card outstanding (Devendra) 42,000 1. Cash at Hand 10,000 2. Family Loan 50,000 2.Savings Account 55,000 3. Vehicle Loan 2,25,000 3. Padam Ltd. Shares 1,80,000 4. Equity Mutual Fund units 2,50,000 5. Deep Discount Bonds # 2,12,500 6. EPF A/c ( Devendra) 3,56,000 7. PPF A/c ( Sandhya) 1,86,000 8. Car 3,40,000 9. Gold Jewelry 3,50,000 Liabilities 3,17,000 10. Agriculture Land (Sandhya) 3,80,000 11. Advance to Builder 3,00,000 Net Worth 24,30,000 12. ULIP Policy (Sandhya) 2,15,000 Total Liabilities & Net Worth 27,47,000 Total Assets 27,47,000 In February, 2007, Devendra s Father-in-Law gifted him plot of land with fair market value at the date of the gift was Rs. 2,50,000. He had himself purchased this plot in Sep 2001 for Rs. 1,50,000. Devendra had sold this plot in July 2008 for Rs. 3,50,000. An expense on sale of plot is 2% of the sale proceeds. # Bonds purchase price, on 1-8-2006. Cost Inflation Index for 1981-82 : 100, 2000-01 : 406, 2001-02 : 426, 2003-04: 463, 2004-05 :480,2006-07 : 519,2007-08 : 551, 2008-09 : 582. Personal and Financial Goals 1. Sandhya needs Rs. 10 Lakh in today s value to start her own Consultancy. 2. Devendra wants to upgrade his managerial skills by joining a Part time One-year Executive program in Management. 3. They want to provide for higher education in the field of Finance to his son Harry. They require Rs. 5 Lakh p.a. (at present cost) for three years starting from his age of 18 to achieve this goal. 4. They want to build a retirement corpus. Post-retirement expenses are 75% of pre-retirement expenses. Both want to retire after 20 years from today. Assumptions Inflation rate is 5.5% p.a. Return on Equity mutual fund is 15% p.a. Return on Debt mutual fund units is 7.5% p.a. Life expectancy of Devendra and Sandhya is 75 and 73 years, respectively. 2
Questions: 1) Devendra wants to know from you, for calculating his Income Tax liability for financial year 2008-09, what is the amount of capital gain taxable in his hands for sale of plot of land? A) Long Term Capital Gain of Rs. 1,74,792 B) Long Term Capital Gain of Rs. 69,653 C) Short Term Capital Gain of Rs. 1,74,792 D) Short Term Capital Gain of Rs. 69,653 2) Sandhya s taxable income under the head salary for the Financial Year 2008-09 is Rs. 2,84,000. She also earns Rs. 80,000 as agriculture income during the same year. What is the Income Tax liability of Sandhya for the FY 2008-09? She made investments of Rs. 35,000 in all, which qualifies under section 80C. A) Rs. 10,094 B) Rs. 13,700 C) Rs. 10,197 D) Rs. 13,184 3) The company Padam Ltd. has paid a dividend of Rs. 4.00 per share this year. The dividend is expected to grow @12% p.a. for the next 3 years and thereafter it is expected to grow @10% p.a. forever. What would be the appropriate value of share today as per dividend discount model, if the required rate of return is 14% p.a.? A) Rs. 181 B) Rs. 103 C) Rs. 114 D) Rs. 132 4) Sandhya wants to know the approximate maturity amount from her ULIP Policy if the expected CAGR (net of all charges) is 12% p.a. According to you the same would be. A) Rs. 13.27 lakh B) Rs. 14.94 lakh C) Rs. 13.54 lakh D) Rs. 13.99 lakh 5) The bonds included in the family s portfolio were purchased at Rs. 8,500 per bond. A maturity value of Rs. 2 lakh per bond was offered after the term of 25 years. The bond also has an inbuilt option that after 5 years the investor can ask for repayment and company shall refund Rs. 12,600 on each bond while after 10 years the company can buy back the bond after paying Rs. 19,400 on each bond to the investor. Devendra wants to know the rate of return in both the cases. A) Yield to call is 8.19% p.a. while yield to put is 8.60% p.a. B) Yield to put is 8.19% p.a. while yield to call is 8.60% p.a. C) Yield to call is 8.60% p.a. while yield to put is 13.47% p.a. D) Yield to put is 8.60% p.a. while yield to call is 13.47% p.a. 6) Devendra has told you that one of his friends was consulting a financial advisor who moved a major chunk of his friend s investments into equities when markets were at their peak resulting in loss of a major portion of that investment. His friend is very upset with that as he was not taken into confidence before 3
taking this step. You convince Devendra that you, being a CFP CM Certificant, are bound by Code of Ethics of Diligence. Which of the following is not a feature of the said Code? While preparing oral and written recommendations, a member of FPSB India shall. A) conduct or have access to research on financial strategies and products that may be appropriate to achieve the client s identified needs and objectives B) develop a suitable financial strategy or plan for the client based on the relevant information collected and analyzed C) take reasonable steps to place the client in a position to comprehend the recommendations and the basis thereof D) build within the recommendations suitable stop loss situations to avoid losses of high magnitude 7) Devendra has tied up with a bank for housing loan at fixed rate of interest of 10.5% p.a. The tenure of loan is 15 years from the date of disbursement of first installment. The EMI increases with the receipt of each fresh disbursement by the Bank. He wants to know what would be the final EMI payable after the full disbursement of loan amount. EMI is paid on the last date of month. A) Rs. 33,652 B) Rs. 33,162 C) Rs. 32,286 D) Rs. 34,712 8) Balchandar Pathak and Manorama have no estate plan till date. Apart from Devendra their family constitutes two sons, two daughters in which one of the daughters is married. As per prevailing Hindu Succession law in India, how much share is Devendra eligible to get from the estate of Balchandar in case he dies intestate? A) One sixth B) One fifth C) One third D) All Property rights goes to Manorama and after her death Devendra will would get his share of the property 9) Devendra wants to buy a life insurance policy on the life of his father as well as both his brothers. However, in case of any eventuality he wants to reserve all legal rights of receiving the policy benefits in his name. He wants to know whether it is legally possible for him. A) Yes, he can buy the policy in the desired way. B) Yes, but he cannot reserve the right to receive the policy benefits. C) No, in the absence of insurable interest he cannot buy life insurance policy in their name. D) He can buy the policy only in the name of his father in the desired way. 10) Devendra wants to invest for his retirement 10% of his salary annually in a dedicated Pension Scheme yielding 8% p.a. till a year prior to his retirement. He wants to know what monthly annuity certain for 20 years he will receive from the beginning of his 56 th year by investing his retirement corpus in the same scheme. (Assume that he starts investing in the Pension Scheme with immediate effect. Ignore taxes and charges) A) Rs. 45,414 B) Rs. 46,671 C) Rs. 37,845 D) Rs. 46,361 4
11) You have advised Sandhya a systematic plan to accumulate funds to set up her own business. She has to invest Rs. 5,000 every month in Kisan Vikas Patra starting from 1 st August 2009, till a month before the maturity of their first KVP investment. The maturity amount of KVPs shall be invested in a balanced Mutual fund scheme generating 0.75% return p.m. She wants to know the approximate accumulated amount of funds at the time of last KVP maturity with them. According to you the same is. (Please ignore taxes and charges if applicable) A) Rs. 15.45 lakh B) Rs. 15.78 lakh C) Rs. 15.57 lakh D) Rs. 15.35 lakh 12) Devendra s father-in-law is a well established businessman and Sandhya is their only child. He wants to include Devendra as a member in their HUF. Is it possible? A) Yes B) No C) Yes, but with prior permission from IT department D) Yes, but first Davendra s father-in-law should prepare a non revocable Will in favour of Devendra 13) Devendra had purchased an LCD TV by Credit card as on 1 st July 2009. The outstanding Credit card liability of Rs. 42,000 is due amount as on 15 th August, 2009. He has paid minimum amount of 5% of due amount on payment due date, with the remaining amount rolled over. From the date of purchase of goods, if there is no amount outstanding on the credit card account, the company allows a free credit period till the due date of payment, provided only that the payment is made in full on or before that due date. In case of no payment or partial payment as well as roll over, the company charges an interest of 2.80% per month on the amount outstanding from the date of purchase of goods for the number of days the amount is outstanding. He wants to know from you, what amount he has to pay as on 30 th August, 2009 to cover all his dues? (Assume credit card due is for purchase of LCD TV only and no further purchases made by him. Ignore service tax) A) Rs. 42,223 B) Rs. 42,247 C) Rs. 40,459 D) Rs. 42,134 14) Sandhya has no clear information about benefits of Critical Illness Rider attached with her ULIP Policy. She wants to know from you, that in case she has been identified with a disease covered under Critical Illness Rider, what amount she would receive as claim under the Critical Illness Rider? A) A sum of Rs. 2 Lakh shall be paid when such a disease is identified and certified by a Doctor. B) Actual Expenses, subject to a maximum of the Rider amount, shall be paid after treatment of disease. C) Rider benefit is available only in case of death of the Insured person by the disease. D) A sum of Rs. 2 lakh shall be paid when disease is identified and another Rs. 2 Lakh shall be paid at the time of death. 5
Case - Dharampal Dharampal Brahambhat, aged 46 years, is a senior executive in a Private Sector Company based in Bhilai. He has been working with this company for the last 21 years and 8 months. Dharampal as a result of his position has been leading a lavish life style; he travels business class and has always been put up in five star hotels on his official visits. He likes to travel overseas and is able to make at least two official cum pleasure trips with his family every year, the expenses for which are borne by the Company. As a result of his busy schedule and extensive travel, he has had very little time to think about his personal finance. His personal finances are in disarray. His wife Vaishali, aged 45 years is a house wife. They have two children. Son Shantanu, aged 21 years, is in his final year at IIT Kanpur. He plans to go for his MS in the US immediately after the completion of his engineering degree. In case Shantanu manages to get a teaching assignment while pursuing the degree in the US the course will cost approx. Rs. 5 lakh p.a. Otherwise the MS in the US would cost Rs. 20 lakh p.a. spread over two years. Their daughter Shivani, aged 23 years, is working as a Chartered Accountant with a private firm in Ahmedabad. Dharampal plans to get her married within the next two years for which he would require at least Rs. 15 lakh to suit his social status. Dharampal has approached you for a critical evaluation of his personal finance. He is ready to reconcile with the fact that he may have to reduce the number of trips overseas and is perfectly fine to take only one holiday overseas in a year. Each overseas holiday with his family would cost him Rs. 300,000. During your discussions with him today the 28 th June 2009, Dharampal has disclosed following facts, which he believes would help you in evaluating his current situation in order to recommend a course of action. Present Salary Breakup of Dharampal Components Annually (Rs.) Basic 8,16,000 House Rent Allowance 2,70,000 Dearness Allowance 4,50,000 Transport Allowance 12,000 Medical Reimbursement 15,000 Additional Extra Allowance 2,37,000 Total 18,00,000 Expenses House hold expenses - Rs. 35,000 p.m. Rent - Rs. 15,000 p.m. Municipal Tax (for house in Bhuj) - Rs. 3,500 p.a. Assets Bank Fixed Deposits - Rs. 7.50 lakh Post office MIS - Rs. 9.00 lakh (Joint with Wife) RBI Bond - Rs. 1.50 lakh PPF - Rs. 11.12 lakh Debt MF - Rs. 2.35 lakh Equity MF - Rs. 2.25 lakh Savings Bank account - Rs. 1.42 lakh House Hold contents (in Bhilai) - Rs. 18.00 lakh House in Bhuj - Rs. 40.00 lakh 6
He plans to shift to his native place Bhuj in Gujarat after his retirement. At present he gets rent of Rs. 12,000 p.m. from his house at Bhuj. Dharampal s mother, Mrs. Rukmanidevi who used to stay with him has expired recently while his father had expired about 10 years ago. He discovered that she had a Demat account in which she had 5,000 shares of Company XYZ and 25,000 shares of Company PQR. The present market price of XYZ is Rs. 750 per share and that of PQR is Rs. 145 per share. She also had bank fixed deposits of Rs. 25,00,000 (maturing on 31.03.10 carrying an interest rate of 7.5% p.a.) and GOI Savings Bonds worth Rs. 35,00,000 (maturing on 01.03.2010 and carrying a interest rate of 8.5% p.a. taxable). Mrs. Rukmanidevi is survived by three sons (including Dharampal) and one daughter. Dharampal is the nominee for all the above investments as well as the Demat Account. As Dharampal has never invested in shares he is not too sure as to how to go ahead with her investments in shares. Dharampal was in Dubai for a period of three years from 2004 to 2007 and he receives dollar denominated compensation from his company. At present he has dollar denominated savings of USD 74,000, which he does not plan to convert into rupees in the near future. Dharampal wants you to evaluate his present financial status and prepare a Financial Plan by factoring in all his requirements. His Goals are as under: 1) He plans to retire when he completes 60 years of age. His life expectancy is 80 years. This is after considering his willingness to invest Rs. 60,000 p.a. starting from now for this purpose. 2) Dharampal wants to insure his household contents. 3) To plan for emergencies. 4) To make a plan for proper cash flow management. 5) To arrange for higher education of Shantanu. 6) To arrange for Shivani s wedding. Indicative Returns and Volatility for various asset classes Indicative Rates p.a. Equity (Shares& MF) 15.00% Liquid MF 5.25% Debt MF 8.00% Bank Fixed Deposits 7.25% Risk Free 5.00% Inflation 6.50% 7
Questions 15) Dharampal has received an increment of 10% in his Basic salary and Dearness Allowance with effect from January 2009. The other components of the salary remain the same. Also, he got a performance bonus of Rs. 1 lakh from his company in the FY 2008-09. He wants to know his taxable HRA for AY 2009-10. A) Rs. 2,07,968 B) Rs. 1,17,968 C) Rs. 2,17,968 D) Rs. 2,01,873 16) Dharampal wants to know from you, what is the status of his nomination in financial assets of his Mrs. Rukmanidevi as she has died intestate? A) Nomination shows that Dharampal will get the full custody and the sole ownership as well of the financial assets. B) Nominee has only the right to receive the proceeds of financial assets; the distribution of such assets to legal heirs may take place later as per Succession law. C) Nominee s role in nomination is equivalent to the role of executor applied in case of Will. D) Nomination gives right of share of ownership even to person who has no blood relation with deceased. 17) Dharampal wants to know the Net Annual value of his house at Bhuj for AY 2009-10. The Municipal value of the house is Rs. 90,000, Fair rent Rs. 1,40,000, Standard rent Rs. 1,20,000. The house was vacant for one month during the previous year 2008-09 and the rent has not changed since then. A) Rs. 1,40,500 B) Rs. 1,36,500 C) Rs. 1,28,500 D) Rs. 1,32,000 18) Dharampal wants to know, the advantage from tax angle by investing in an Equity Mutual Fund scheme vis-a vis direct investment in equity shares? A) Mutual Fund scheme pay tax-free dividend, while dividends paid directly by companies are taxable B) Mutual Fund schemes are not subject to short-term Capital Gains tax on sale of shares, such gains may be passed on to investors in the form of tax free dividends C) Equity Mutual Fund schemes do not pay dividend distribution tax, while dividend payments from companies are subject to distribution tax D) Mutual fund redemptions are exempt from capital gains tax 19) You have found that all the stocks in Mrs. Rukmanidevi s portfolio move together and have a high correlation. How will that impact the risk and return of the portfolio? A) The portfolio will have a return that is the average of the stocks included in it, but have a risk that is lower than the risk of the stocks. B) The portfolio will have a return that is the average of the stocks included in it, but have a risk that is higher than the risk of the stocks. C) The portfolio will have a return and risk, which lies in the range of risk and return of the stocks included in it. D) The portfolio will have a return that is lower than the stocks included in it, but have a risk that is higher than the risk of the stocks. 8
20) Mrs. Rukmanidevi held her portfolio for 10 years. How will you compute her return over the period in annual terms? A) The holding period return is computed by comparing the total appreciation in the portfolio and the dividends received, with the original amount invested. The number can then be annualized. B) The CAGR of the portfolio, including the dividends received, represents the return on the investment. C) The holding period return will be equal to the dividend yield over the holding period. D) Annual return for every year has to be first computed. This has to then be averaged to know the returns over the 10 year period. 21) Dharampal would invest in Equity and Debt in a ratio that would give him returns of 12% p.a. during accumulation phase and change the ratio after retirement and estimates to get 10% p.a. post retirement. What will be approximate surplus/deficit in his required corpus for meeting household expenses and actual corpus at the time of retirement? He would allocate for this purpose Rs. 100 lakh from his retirement proceeds. A) Deficit of Rs. 128 lakh B) Deficit of Rs. 28 lakh C) Surplus of Rs. 28 lakh D) Surplus of Rs. 128 lakh 22) Dharampal wants to buy a Plasma TV, the cash purchase price is Rs. 1.50 lakh. The selling company however offers installment plan, which allows an immediate payment of Rs. 20,000 and a series of 5 half yearly payments thereafter. The first installment is payable after one and a half years. If the company wants rate of interest of 10% p.a. compounded half yearly what will the half yearly installment be? A) Rs. 34,760 B) Rs. 38,197 C) Rs. 32,992 D) Rs. 33,104 23) Dharampal, wants to purchase now a deferred annual annuity certain payable from his age of 60 years till he attains 80 years. Annuity amount of Rs. 1,00,000 every year would be paid, first installment due at the end of 60 years. What approximate lump sum amount should he invest now if the investment remains throughout in Debt Mutual Fund Scheme? A) Rs. 3,61,000 B) Rs. 5,73,500 C) Rs. 13,34,300 D) Rs. 8,71,800 24) Dharampal had done following transactions during the Financial Year 2008-09 with respect to his account. 1. Paid off credit card liability worth Rs. 10,000 using savings account 2. Transferred Rs. 4,000 from savings account to PPF account 3. Purchased Rs. 2,000 of furniture on credit. What is the net worth of Dharampal after these transactions? A) Reduces by Rs. 16,000 B) Reduces by Rs. 2,000 C) Remains the same D) Reduces by Rs. 10,000 9
25) An analyst has advised Dharampal after considering him to be risk averse, to invest in a portfolio to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward. He was referring to. A) Sharpe Ratio B) Post-Modern Portfolio Theory C) Jensen s Ratio D) Modern Portfolio Theory 26) You tell Dharampal that the primary objective of Financial Planning is to manage one s cash flows optimally to achieve one s financial goals. Which one of the following best describes the management of liquidity? It is to manage cash in order to. A) minimise the cash balances to optimise interest earnings B) arrive at optimal cash balance based on a well drawn budget C) maintain enough cash to meet all liquidity requirements D) strike a balance between liquidity needs and interest foregone on cash balances 27) Dharampal wants to know the logic behind calculation of risk premium for Life Insurance of a person his age, given that in a population of 1,000 persons aged 46 years and are healthy. It is expected 6 persons die during the year. If the economic value of the loss suffered by each family of the dying person is Rs. 5,00,000, calculate the pure risk premium for each person per thousand sum assured. A) Rs. 60 B) Rs. 300 C) Rs. 30 D) Rs. 6 28) You have advised Dharampal to buy an accident insurance policy which pays TPD benefit of Rs. 5,000 per week, for up to 104 weeks. He wants to know that if he happens to meet with an accident and is disabled and bedridden for 9 months and he has available leave of 6 weeks only, after which he is on loss of pay. What benefit amount will he get from the insurance company? A) Rs. 1,65,000 B) Rs. 1,95,000 C) Rs. 5,20,000 D) Rs. 1,50,000 29) You have asked Dharampal to prepare an estimation of the revenue and expenses over a specified future period of time. You are referring him to prepare a/an. A) Income and Expenditure Statement B) Balance Sheet C) Budget D) Cash Flow statement 10