BUTTERFIELD CASE

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School

Washington State University *

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325

Subject

Finance

Date

Feb 20, 2024

Type

docx

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Uploaded by EarlDanger13250

Facts about the Butterfields  John Butterfield and his wife Haley live in a new home on the outskirts of Any city, Any state.  John is 49 years old, and Haley is 44 years old.  They have been married for 23 years and have three children.  Their son Troy is 20 years old and is a baseball player on scholarship at the University of Anystate.  Daughter Holly is 17 years old and plans to attend State University next fall as a cadet to begin pursuing a career in the Marine Corps.  The Butterfields have concentrated their college saving goals on their youngest daughter, Naomi, who is 13 years old.  Both John and Haley are in excellent health.  The Butterfields have come to seek help for financial planning questions and concerns. Global Assumptions (Valid unless Otherwise Specified in Certain instances) - Inflation: 3.5 percent - All income and expense figures are given in today’s dollars. - Federal marginal tax bracket: 22 percent - State marginal tax bracket: 5.75 percent - Any qualified plan or IRA contribution growth rates are assumed to stop at the federally mandated limit unless otherwise restricted. - All nominal rates of return represent pretax returns. Income Issues - John has worked for the last fourteen years as an engineer for CNS Design. He has a salary of $81,000. He would like to retire at age sixty-seven. - Haley has worked as a CPA for seventeen years, the last fourteen of which have been out of their home. She also does consulting work from home. Though her earnings vary from month to month, she estimates that she will earn $65,000 this year. She wants to retire at the same time as John. - John and Haley also assume that their salaries will increase, on average, by 3.5 percent per year over their working lives. This year John and Haley anticipate earning $600 in interest and non- qualified mutual fund dividend distributions, which will be reinvested.

1. Which of the following strategies can the Butterfields use to improve their cash flow situation? a. Pay off credit card balances with monetary assets. b. Decrease insurance deductibles. c. Reduce IRA contributions and use the proceeds to purchase a variable universal life insurance policy. d. All of the above. 2. The Butterfields’ current ratio is (rounded): a. 0.62 b. 0.79 c. 1.68 d. 3.00 3. The Butterfields’ savings ratio, using gross earned income and including employer 401(k) matching but excluding reinvested interest and dividends, is (rounded): a. 4 percent b. 10 percent c. 16 percent d. 22 percent 4. John and Haley have retirement account balances. John and Haley would like to know what their options will be in relation to these balances when John and Haley reach retirement. Which of the following statements describes their IRA retirement situation? A. John can roll over his 401(k) account balance into an IRA. B. Haley cannot roll over her account balance because her assets are held in a Keogh.

C. Both John and Haley can roll over their account balances into an IRA and take a special five-year averaging tax technique on amounts withdrawn at that time. D. Haley can roll over her Keogh account balance into an IRA. a. III only b. I and II only c. I and III only d. I and IV only 5. Which of the following is true if Haley closes her CPA practice to join a large consulting company this year? a. Because she will be changing jobs, she will no longer be covered under her current health insurance plan; instead, she will need to continue coverage using COBRA provisions until she become eligible for coverage with the consulting company. b. She can remain on John’s health insurance policy until she is eligible for benefits under her new employer’s insurance plan. c. Because of her good health status, if she were to drop off of John’s health insurance plan and move to a policy offered by the consulting company, John’s health insurance premiums will increase. d. She must enroll in a marketplace health insurance plan in the state where she resides. 6. If John, Haley, and Naomi are involved in an accident that requires medical care, how much will John’s health insurance pay, including deductibles and copayments, given the following expenses? Assume no annual limits have been met. John $1,800; Haley $3,700; Naomi $4,200.

a. $1,750 b. $7,160 c. $7,950 d. $8,950 7. Help John understand their homeowner’s insurance coverage. They currently have an HO-3 policy (Special Form) with no endorsements. What perils are excluded from coverage? a. Flood b. Fire c. Collapse caused by a covered peril d. Weight of ice e. Volcanic eruption 8. If the Butterfields suffer a $47,000 homeowner’s loss due to fire, how much will the insurance company pay on the claim, accounting for any deductible and co-pay provisions? a. $45,193 b. $45,693 c. $46,500 d. $47,000 9. The Butterfields recently lived through a major windstorm. The experts said the storm was not a tornado, but John and Haley would argue otherwise. Their home was terribly damaged. It has been estimated that it will cost $250,000 to make repairs to the house. Excluding listed deductibles and copayments, how much must the Butterfields pay out of pocket toward the repairs? a. $0

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