Finance Chapter 19 His Wife Didn't Know About And Believed

ANSWERS TO CHAPTER QUESTIONS

Chapter 19 Completing the Process

1) The concepts that underlie PFP theory include:

a) The household operates like a business.

b) The goal of PFP is to present the highest standard of living attainable.

c) The goal becomes maximization of discretionary expenditures.

2) It provides an easy to understand benchmark and allows the use of business techniques to

solve problems.

3) We assume that time allocated between leisure and work is fixed. Therefore efficient

4) Without integration people cannot complete the task of allocating scarce resources among

alternative choices, or at least not allocated efficiently.

5) SWOT stands for strengths, weaknesses opportunities and threats. The strengths and

weaknesses are internal, opportunities and threats emanate from the external environment.

This kind of analysis provides dimension to any plan and helps generate the best choice for

many problems.

9) Yes, people make integrated financial decisions. They don’t always do so and are more

10) The sources and uses of cash for the household are as follows:

a) Debt – Source or Use

b) Living Costs – Use

c) Revenues – Source

d) Special Circumstance Planning – Use

11) A financial plan is important because it…

a) Integrates all needs – forces decisions

b) Provides structure

12) The steps of a financial plan are to:

a) Establish the scope of the activity

i) Why specific initially are you trying to accomplish?

i) Have you completed the data gathering process?

ii) Are the goals clearly defined?

c) Compile and analyze the data

i) Can you benefit from additional analysis

d) Develop solutions and complete the plan.

i) Have the entire range of solutions been considered?

e) Monitor the Plan

i) Should the plan be altered due to changing circumstances

13) The behavioral review establishes whether the financial recommendations are likely to be

followed or whether additional steps or alterations in recommendations are needed in view of

14) A successful financial plan:

a) Is clear and logical

15) Circumstances change and sometimes plans are made with what are in retrospect unrealistic

assumptions. By comparing actual vs. benchmark and altering results where necessary the

ANSWERS TO CHAPTER PROBLEMS

Chapter 19 Completing the Process

1) Earnestos was an accountant. He had a good job with a major accounting firm with a right

future. He also had a huge spending habit. He had $15,000 of credit card debt and was

adding to it each month. His wife didn’t know about it and believed that he had placed money

each month into a pension plan. She had offered to go to work, but he said it wasn’t

necessary. Perform a SWOT analysis and make specific recommendations for Earnestos and

his wife.

Solution:

Strengths: Earnestos had a stable job with a good outlook.

Threats: The main threat came from a continuation of Earnestos’s current spending habits. An

anticipated rise in external inflation and interest rates would raise their costs and vulnerabilities.

ANSWERS TO CASE APPLICATION QUESTIONS

Chapter 19 Completing the Process

Note: The assumed investment rate was 6%. The number was left out of the description.

1) Presently, the couple cannot save the amount they initially pledged based on the disclosure

in earlier chapters Richard is the problem. Even though his remark about things will work out

2) Monica’s offer to take a job is an excellent idea. While she isn’t skilled there are many jobs

that she could qualify for. It alone could cover the additional savings required after tax and

then some.

3) Richard wants to be more aggressive. Monica wants to cut back on risk even though it could

make it more difficult to reach their goals. If the savings comes from a paring of expenses

4) If Monica works there would be a lesser need for insurance as income replacement.

5) Selling their house and buying a smaller one will make sense eventually. However given all

6) Recommendations may include:

a) Monica goes to work.

b) The family has a detailed budget set up.

c) Their financial planner monitors compliance with the budget.

d) Monica should take an active role monitoring Richard’s investment moves, preferably

before they are made.

e) If Richard’s actions in spending, saving and investment decisions do not change, Monica

7) Yes as stated in question 6.

a) Monica should monitor Richard’s actions.

b) The financial planner should monitor both their actions.

c) A comprehensive budget should be established with actuals compared with it.

8) Follow-up should be done quarterly in person. This face to face interaction is more likely to

ensure compliance. Particularly in view of their closeness toward the retirement date, at the

Answers to CFP® Questions

Question

Answer

Question 19.1.A

D

Question 19.1.B

C

Question 19.2

A