BUSN380 Week 7 Threaded Discussion â€“ Zero-based Assets & Home Evaluation and Estate Taxe
BUSN380 Week 7 Threaded Discussion â€“ Zero-based Assets & Home Evaluation and Estate Taxe
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BUSN380 Week 7 Threaded Discussion Zerobased Assets amp Home Evaluation amp Estate Taxes US Treasury bills held to maturity have a beta of zero Why Discuss the implications with respect to your overall investment portfolio as you approach retirement age What purpose does an investment with a zero beta serve in a retirement portfolio David the real threat that that last week s political impasse posed was not so much a federal defaulting on TBills While no investment is truly free of risk scenarios in which a major government with a long track record of stability defaults on its obligations are unlikely and therefore have no place in financial planning Republicans were concerned that the US Government has reached its debt ceiling a selfimposed limit on the amount it can borrow and without an agreement to raise the limit borrow more money the threat surfaced of a federal government shutdown The real threat was that confidence in US Treasury bonds would falter in a number of ways First by causing a disruption in the issuance of Treasury debt as happened in 199596 a freeze would cause investors to seek alternative financial investments perhaps causing a run on Treasuries Such a run would increase the cost of US debt putting even more stress on our budget and the resulting enormous capital ows would destabilize global financial markets Second public spending would dip again causing institutional investors worldwide to worry that the US would enter a second very deep recession and never be able to repay its debt Finally the sheer recklessness of a debt freeze during these shaky times would signal to already nervous investors that there was a significant amount of political risk which could cause them to shy away from investing in the United States generally Taken together these factors would almost certainly result in a significant increase in the interest rates we currently pay on our national debt currently just above 25 percent for a 10year Treasury note If in the near term these rates moved even to 59 percent the longterm rate predicted by the Congressional Budget Office then our interest payments would increase by more than double to nearly 600 billion a year These rates could climb even higher if investors began to price in a default risk into Treasury bills which would just make our budget problems that much worse BUSN380 Week 7 Threaded Discussion Zerobased Assets amp Home Evaluation amp Estate Taxes The US dollar is the world s reserve currency because of the depth and liquidity of the US Treasury bond market If this market is severely disrupted and investors lost confidence in US Treasurys then it is unclear where nervous investors might go next A sharp and swift move by investors out of US Treasury bonds could be highly destabilizing straining the already delicate global economy httpenwikipediaorgwikiRiskfree interest rate httpwwwamericanDrogressorgissues201010big freezehtml Discuss the factors that may lead to an appreciation in the value of a home over the next 15 years Discuss the factors that may lead to a depreciation in the value of a home over the next 15 years How will the value of your home affect the amount of tax to which your estate will be liable subject to your death The estates of all US citizens are subject to the federal estate tax but not every estate actually has to pay the tax The Internal Revenue Code gives each US citizen a coupon that can be applied against his or her estate tax bill In 2009 the quotcouponquot was 3500000 and for the 2010 2011 and 2012 tax years the quotcouponquot is 5000000 Thus if the value of the net estate meaning the gross estate reduced by allowable estate tax credits and deductions does not exceed 5000000 then the estate will pass to the heirs free from federal estate taxes Note that under the provisions of the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of 2010 the 5000000 estate tax exemption and 35 estate tax rate are only scheduled to be in effect until December 31 2012 at which time the federal estate tax laws will revert back to the laws that were in effect in 20012002 This means that on January 1 2013 the federal estate tax exemption will drop all the way down to 1000000 and the estate tax rate will jump up to 55 httpwillsaboutcomodunderstandingestatetaxesawhatisestatetaxhtm BUSN380 Week 7 Threaded Discussion Zerobased Assets amp Home Evaluation amp Estate Taxes Let39s calculate the rate of return on an investment when nancial leverage has been used by supposing we invested 15000 from our hardearned savings in a property and we also took out a mortgage of 100000 with an interest rate of 7 on this same property If after three years we sold the property for 140000 1 What is our gross pro t 2 What is our net pro tloss 3 What is our rate of return on the investment property The GROSS profit calculation is straightforward We simply subtract our initial purchase price from our sale price Therefore our gross profit is 140000 115000 or 25000 Now the mortgage of 100000 at 7 implies that we will be paying 7 per year for the number of years we actually own the property Because we sold the house after 3 years our interest payments totaled 21000 37100000 while we owned the house Our NET profit or loss is our gross profit minus our expenses on the property during the time we owned it or 25000 21000 or 4000 It is important to note that our net profit or loss does NOT include our initial investment of 15 000 We are only assessing the investment39s performance with our net profit or loss calculation Our rate of return uses our initial investment amount By taking our net profit or loss of 4000 and dividing it by 15 000 we get 26 So we have done quite well with our initial investment of 15000 26 is our rate of return Let39s try another Let39s say we invested 10000 of our own money along with a 90000 mortgage at 8 in a property that we later sold for 120000 Ans Assuming the same period of 3 years 1 What is our gross profit 120000 100000 20000 2 What is our net loss 20000 90000 X 8 X 3 20000 21600 1600 BUSN380 Week 7 Threaded Discussion Zerobased Assets amp Home Evaluation amp Estate Taxes 3 What is our rate of return on the investment property l600 10000 16 Mutual funds serve the investor in what ways Why would one choose a mutual fund over a single stock Also what are the three different classi cations of mutual funds and how do these classi cation differ Mutual funds are usually a much better option for smalltime investors just wanting to prepare for their retirement They are collections of stocks bonds or other securities bought by a group of investors and managed by an investment company Funds offer a much lower risk while maintaining very reasonable rates of return whereas single stocks are great for people who have some money to play with and have plenty of time to make investing their hobby Many financial gurus advise that single stock investments do not consistently generate returns like good growth stock mutual funds When you buy a share in a fund you are really buying a piece of a large diverse portfolio On the other hand stocks are shares of a single company One might choose a mutual fund to benefit from having someone else manage the headaches that come with the daytoday decisions of a changing stock investment and a manager who has access to costly information Diversification is also a big selling point for mutual funds as there is relative safety in numbers When one security in a fund drops a shrewd fund manager may have included stocks that could cushion or offset that loss Funds are also more liquid investors can cash in on any business day whereas when you sell a stock you must wait three business days before the trade settles and your money is released There is less red tape and more ease of transaction with mutual funds than with stocks since the latter requires that you become directly involved in the timeconsuming process of placing buy orders and selling shares Choosing mutual funds is a much easier task than choosing single stocks They require a little upfront research finding a worthwhile fund and you receive a statement periodically to monitor its performance compared to other funds in its class Choosing single stocks is a much more intimidating task because it requires at from one to three hours of research in investments a BUSN380 Week 7 Threaded Discussion Zerobased Assets amp Home Evaluation amp Estate Taxes week They can cost you a significant amount of money if you buy and sell holdings on a regular basis because of the fees and capital gains taxes you Will pay on your trades Mutual funds usually do not cost anything to get into in the first place but your gains will be slightly reduced by the expenses of the fund Careful planning can easily minimize the amount of fees that you have to pay by investing in a solid fund With low fees httpWWWannuityadvantagecomarticlesID75htm httpWWWamericanconsumemewscom200707singlestocksormutualfundshtml Now let39s discuss how to value a mutual fund by applying the calculation for Net Asset Value Let39s say a Fidelity Telecommunications mutual fund has the following characteristics a Total Asset Value 225000000 b Total Liabilities 500000000 c Total number of shares 4400000 What is the mutual fund39s Net Asset Value using the equation on page 516 of your text Net Asset Value Value of the fund39s portfolioliabilities Number of share outstanding Net asset value Value of the fund39s portfolioliabilities number of shares outstanding 655 million5million 30 million shares 2167 per share Answer is A Formula Net Asset Value NAV Value of the fund s portfolio Liabilities number of shares outstanding BUSN380 Week 7 Threaded Discussion Zerobased Assets amp Home Evaluation amp Estate Taxes B Value of the fund s Portfolio 22500000000 Liabilities 500000000 Shares outstanding 440000000 C Value of funds portfolio 22500000000 Liabilities 500000000 22000000000 22000000000 Shares outstanding440000000 5000 Per Share In 2008 if a wealthy married couple were to gift their 10 nieces and nephews the maximum taxfree amount in one year how much would they gift in total What happens to this gifting as it relates to their estate is the money removed from their estate or not for tax purposes The most common and basic way for wealthy people to share their wealth with family members Without paying taxes is to take advantage of the annual Gift Exclusion granted by the IRS Every year you generally can give a gift valued at up to a certain amount each to any number of people and none of the gifts will be taxable In 2008 the exclusion was 12000 This means that they would have given 120000 in total to their family members or if they both gifted the full allowable amount separately 240000 Estate tax may apply to taxable estate upon an individual s death Taxable estate is the gross estate less allowable deductions and since either 120000 or 240000 was deductible then the money is removed from the estate and not taxed httpwwwirsgovpublicationsp950ar02htmlen US publink100099451 BUSN380 Week 7 Threaded Discussion Zerobased Assets amp Home Evaluation amp Estate Taxes We have talked a bit about nancial leverage in this discussion But let39s take a moment to be definitional in our discussion What do we mean when we use the term quotfinancial leveragequot A measure of a company39s financial leverage is the measure of its Debt to Equity ratio It is calculated by dividing its total liabilities by stockholders39 equity and indicates what proportion of equity and debt the company is using to finance its assets Sometimes only interestbearing longterm debt is used instead of total liabilities in the calculation Also known as the Personal DebtEquity Ratio this ratio can apply to personal financial statements as well as corporate ones A high debtequity ratio generally means that a company has been aggressive in financing its growth with debt or highly leveraged This can result in volatile earnings as a result of the additional interest expense If it borrows a lot of money to finance increased operations high debt to equity the company could potentially generate more earnings than it would have without this outside financing If this were to increase earnings by a greater amount than the debt cost interest then the shareholders benefit since more earnings will be spread among the same number of shareholders However the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle This can lead to bankruptcy which would leave shareholders with nothing httpwwwinvestopediacomtermsddebtequitvratioasp Let39s say we bought a rental property for 200000 cash One year later he sold it for 240000 A What was the return on his 200000 investment B Now suppose we invested only 20000 of our money borrowed 180000 interest free from a relative What was our return on investment in this case To go over our last problem if we bought a rental property for 200000 cash and one year later we sold it for 240000 our return is 20 percent on the investment 40000 divided by 200000 When we invest only 20000 of our own money and borrowed 180000 interest free What BUSN380 Week 7 Threaded Discussion Zerobased Assets amp Home Evaluation amp Estate Taxes was our return To find our rate of return in this case with leverage we must first subtract our investment from our net profit before we divide by our investment So the equation for Return on Investment looks like this Xyy where X is our net profit and y is our initial investment So if our initial investment was 20000 and our net profit was 4000000 than 400002000020000 100
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