MFD - Level 2

Quick and Easy Chapter Summaries

Chapter 11 : Cases in financial planning

Chapter 11 in the MFD Level 2 workbook has 16 cases in financial planning, which are exercises for you to solve. We give below these 16 cases, along with their
correct answers as well as the manner in which the answers have been arrived at. We hope this will give you sufficient insights into how to tackle the financial
planning cases that will be part of the MFD Level 2 certification examination.

Q1. An investor bought units of a scheme as follows: Feb 5, 2010 500 units @ Rs. 12; Aug 7, 2010 600 units @ Rs. 13. He sold 600 units at Rs. 14 on March 2,
2011. Cost inflation index numbers are 2008-09 582; 2009-10 632; 2010-11 711; 2011-12 785. Assume the investor is in 20% tax bracket. Ignore STT, Surcharge &
education cess. How much long term capital gain did the investor book on the sale, if the units related to equity scheme?

a. Rs. 1000

b. Rs. 100

c. Rs. 200

d. Rs. 500

Ans: a

Solution:

Given data:

The calculation is done on FIFO basis. Only 500 units bought on Feb 5, 2010 sold on March 2, 2011 qualify to be long term capital gain as the period is above one year.

Therefore, 500 units bought at Rs. 12 = rs. 6000

500 units sold at Rs. 14=Rs. 7000

Long term capital gain = Rs. 7000 - rs. 6000 =Rs. 1000

Q2: An investor bought units of a scheme as follows: Feb 5, 2010 500 units @ Rs. 12; Aug 7, 2010 600 units @ Rs. 13. He sold 600 units at Rs. 14 on March 2,
2011. Cost inflation index numbers are 2008-09 582; 2009-10 632; 2010-11 711; 2011-12 785. Assume the investor is in 20% tax bracket. Ignore STT, Surcharge &
education cess. How much short term capital gain did the investor book on the sale, if the units related to equity scheme?

a. Rs. 1000

b. Rs. 100

c. Rs. 200

d. Rs. 500

Ans: b

Solution:
The units bought on Aug 7. 2011 qualify to be short term.

100 units bought at Rs. 13 =Rs. 1300

100 Units sold at Rs. 14 =Rs. 1400

Short term capital gain =Rs. 1400 -Rs. 1300 =Rs. 100

Q3: An investor bought units of a scheme as follows: Feb 5, 2010 500 units @ Rs. 12; Aug 7, 2010 600 units @ Rs. 13. He sold 600 units at Rs. 14 on March 2,
2011. Cost inflation index numbers are 2008-09 582; 2009-10 632; 2010-11 711; 2011-12 785. Assume the investor is in 20% tax bracket. Ignore STT, Surcharge &
education cess. How much long term capital gain did the investor book on the sale, if the units related to debt scheme?

a. Rs. 1000

b. Rs. 100

c. Rs. 200

d. Rs. 500

Ans: a

Solution: Same as answer 1

Q4: An investor bought units of a scheme as follows: Feb 5, 2010 500 units @ Rs. 12; Aug 7, 2010 600 units @ Rs. 13. He sold 600 units at Rs. 14 on March 2,
2011. Cost inflation index numbers are 2008-09 582; 2009-10 632; 2010-11 711; 2011-12 785. Assume the investor is in 20% tax bracket. Ignore STT, Surcharge &
education cess. How much long term capital gain tax will the investor have to pay, if the units related to equity scheme?

a. Rs. 150

b. Rs. 100

c. Rs. 200

d. Nil

Ans: d

Solution:

For equity schemes, where STT has been paid, long term capital gain tax has been exempted. Therefore, the answer is Nil.

Q5: An investor bought units of a scheme as follows: Feb 5, 2010 500 units @ Rs. 12; Aug 7, 2010 600 units @ Rs. 13. He sold 600 units at Rs. 14 on March 2,
2011. Cost inflation index numbers are 2008-09 582; 2009-10 632; 2010-11 711; 2011-12 785. Assume the investor is in 20% tax bracket. Ignore STT, Surcharge &
education cess. How much long term capital gain tax will the investor have to pay, if the units related to debt scheme?

a. Rs. 150

b. Rs. 100

c. Rs. 50

d. Nil

Ans: c

Solution:
For debt scheme:

1. 10% on Rs. 1000 =Rs. 100

2. With Indexation,

The cost of indexed acquisition becomes = 12*(711/632) =rs. 13.5

Therefore the cost of 500 units becomes = 500 * 13.5 = Rs. 6750

500 units sold at Rs. 14 = 500* 14 =Rs. 7000

20% tax on (7000-6750) =Rs. 50

Lower of 1 & 2 is Rs. 50

Q6: An investor bought units of a scheme as follows: Feb 5, 2010 500 units @ Rs. 12; Aug 7, 2010 600 units @ Rs. 13. He sold 600 units at Rs. 14 on March 2,
2011. Cost inflation index numbers are 2008-09 582; 2009-10 632; 2010-11 711; 2011-12 785. Assume the investor is in 20% tax bracket. Ignore STT, Surcharge &
education cess. How much short term capital gain tax will the investor have to pay, if the units related to equity scheme?

a. Rs. 15

b. Rs. 10

c. Rs. 20

d. Nil

Ans: a

Solution:

For equity scheme, short term capital gain is 15%

15% of Rs. 100 =Rs. 15

Q7: An investor bought units of a scheme as follows: Feb 5, 2010 500 units @ Rs. 12; Aug 7, 2010 600 units @ Rs. 13. He sold 600 units at Rs. 14 on March 2,
2011. Cost inflation index numbers are 2008-09 582; 2009-10 632; 2010-11 711; 2011-12 785. Assume the investor is in 20% tax bracket. Ignore STT, Surcharge &
education cess. How much short term capital gain tax will the investor have to pay, if the units related to debt scheme?

a. Rs. 15

b. Rs. 10

c. Rs. 20

d. Nil

Ans: c

Solution:

For debt scheme, the tax on short term capital gain is the tax slab the investor falls in. In this case it is 20%.

20% tax on Rs. 100 = Rs. 20

Q8: An investor bought units of a scheme as follows: Feb 5, 2010 500 units @ Rs. 12; Aug 7, 2010 600 units @ Rs. 13. He sold 600 units at Rs. 14 on March 2,
2011. Cost inflation index numbers are 2008-09 582; 2009-10 632; 2010-11 711; 2011-12 785. Assume the investor is in 20% tax bracket. Ignore STT, Surcharge &
education cess. Financial planner should advise investor to sell the equity units only after one month so that tax is not minimised.

a. True

b. False

Ans: b

Solution: Tax won't be minimised

Q9: The XY family has investments of Rs. 30 lakh in debt and Rs. 20 lakh in equity. Recently married, soon after they graduated together, they saved after tax, Rs.
15 lakh last year. With attractive salary they both earn, they expect their annual savings to go up 20% every year. They plan to invest in the same debt equity
ratio. The financial planner expects a post tax yield of 7% on debt and 15% on equity. The family would like to go off on a world tour in 4 years. They reckon the
current cost of the tour to be USD 50000 (Rs. 50 = 1 USD). The rupee is expected to get weaker by 3% p.a., while holiday costs may appreciate 5% p.a. They also
want to buy a house in 7 years. The current cost of their preferred house is Rs. 1 crore, which is expected to go up 10% p.a. (Assume all savings are invested at
the end of the year). What is the weighted average yield expectation for the XY family on their portfolio?

a. 11%

b. 10.2%

c. 11.5%

d. 10.5%

Ans: b

Solution:

Debt % of investment = 30/ (30 + 20) = 0.6

Equity % of investment = 20/(30 + 20) = 0.4

Weighted average yield = (0.6*7%) +(0.4 * 15%) = 10.2%

Q10: The XY family has investments of Rs. 30 lakh in debt and Rs. 20 lakh in equity. Recently married, soon after they graduated together, they saved after tax,
Rs. 15 lakh last year. With attractive salary they both earn, they expect their annual savings to go up 20% every year. They plan to invest in the same debt equity
ratio. The financial planner expects a post tax yield of 7% on debt and 15% on equity. The family would like to go off on a world tour in 4 years. They reckon the
current cost of the tour to be USD 50000 (Rs. 50 = 1 USD). The rupee is expected to get weaker by 3% p.a., while holiday costs may appreciate 5% p.a. They also
want to buy a house in 7 years. The current cost of their preferred house is Rs. 1 crore, which is expected to go up 10% p.a. (Assume all savings are invested at
the end of the year). If the return expectations materialise, what would be the value of their current portfolio in 4 years?

a. Rs. 39.3 lakh

b. Rs. 35 lakh

c. Rs. 74.3 lakh

d. Rs. 82.3 lakh

Ans: c

Solution:

A= P *(1+ i)^n

For debt = 30 * (1+0.07)^4= 39.32

For equity = 20 * (1+0.15)^4 = Rs. 34.98

Total= 39.32 + 34.98 = Rs. 74.3

Q11: The XY family has investments of Rs. 30 lakh in debt and Rs. 20 lakh in equity. Recently married, soon after they graduated together, they saved after tax,
Rs. 15 lakh last year. With attractive salary they both earn, they expect their annual savings to go up 20% every year. They plan to invest in the same debt equity
ratio. The financial planner expects a post tax yield of 7% on debt and 15% on equity. The family would like to go off on a world tour in 4 years. They reckon the
current cost of the tour to be USD 50000 (Rs. 50 = 1 USD). The rupee is expected to get weaker by 3% p.a., while holiday costs may appreciate 5% p.a. They also
want to buy a house in 7 years. The current cost of their preferred house is Rs. 1 crore, which is expected to go up 10% p.a. (Assume all savings are invested at
the end of the year). How much is the expected outlay in future on the world tour?

a. Rs. 34.01 lakh

b. Rs. 30.4 lakh

c. Rs. 28.1 lakh

d. Rs. 36.7 lakh

Ans: a

Solution:

Depreciation of rupee = 3% p.a

Appreciation of holiday costs = 5 % p.a.

Total increase in cost per dollar = 8% p.a.

(50000*50*(1+0.08)^4 = Rs. 3401222.4 or Rs. 34.01 lakh

Q12: The XY family has investments of Rs. 30 lakh in debt and Rs. 20 lakh in equity. Recently married, soon after they graduated together, they saved after tax,
Rs. 15 lakh last year. With attractive salary they both earn, they expect their annual savings to go up 20% every year. They plan to invest in the same debt equity
ratio. The financial planner expects a post tax yield of 7% on debt and 15% on equity. The family would like to go off on a world tour in 4 years. They reckon the
current cost of the tour to be USD 50000 (Rs. 50 = 1 USD). The rupee is expected to get weaker by 3% p.a., while holiday costs may appreciate 5% p.a. They also
want to buy a house in 7 years. The current cost of their preferred house is Rs. 1 crore, which is expected to go up 10% p.a. (Assume all savings are invested at
the end of the year). If new savings are completely used for the world tour and other luxuries, how equipped is the current investment portfolio for meeting the
cost of the house in 7 years?

a. Completely inadequate

b. Marginally inadequate

c. Just about adequate

d. Comfortably covered

Ans: a

Solution:

Value of current investment portfolio excluding new savings after seven years would be :

{30*(1+0.07)^7}+(20*(1+0.15)^7}=48.17 + 53.20= Rs. 101.37 lakhs

Value of house in 7 years would be = (100* (1+0.10)^7) = Rs. 194.87 lakhs

Therefore, the investment is completely inadequate to purchase the house

Q13: The XY family has investments of Rs. 30 lakh in debt and Rs. 20 lakh in equity. Recently married, soon after they graduated together, they saved after tax,
Rs. 15 lakh last year. With attractive salary they both earn, they expect their annual savings to go up 20% every year. They plan to invest in the same debt equity
ratio. The financial planner expects a post tax yield of 7% on debt and 15% on equity. The family would like to go off on a world tour in 4 years. They reckon the
current cost of the tour to be USD 50000 (Rs. 50 = 1 USD). The rupee is expected to get weaker by 3% p.a., while holiday costs may appreciate 5% p.a. They also
want to buy a house in 7 years. The current cost of their preferred house is Rs. 1 crore, which is expected to go up 10% p.a. (Assume all savings are invested at
the end of the year). How equipped is the investment portfolio created from new savings, for meeting the cost of house in 7 years?

a. Completely inadequate

b. Marginally inadequate

c. Just about adequate

d. Comfortably covered

Ans: d

Solution:

Value of house in 7 years would be = (100* (1+0.10)^7) = Rs. 194.87 lakhs

Value of new savings in 7 years would be as follows: Considering 15 lakh savings last year

Therefore, new savings comfortably cover the purchase of house

Q14: The XY family has investments of Rs. 30 lakh in debt and Rs. 20 lakh in equity. Recently married, soon after they graduated together, they saved after tax,
Rs. 15 lakh last year. With attractive salary they both earn, they expect their annual savings to go up 20% every year. They plan to invest in the same debt equity
ratio. The financial planner expects a post tax yield of 7% on debt and 15% on equity. The family would like to go off on a world tour in 4 years. They reckon the
current cost of the tour to be USD 50000 (Rs. 50 = 1 USD). The rupee is expected to get weaker by 3% p.a., while holiday costs may appreciate 5% p.a. They also
want to buy a house in 7 years. The current cost of their preferred house is Rs. 1 crore, which is expected to go up 10% p.a. (Assume all savings are invested at
the end of the year). What would be the value of the portfolio created from new savings, at the end of 3 years, if these are invested in the same debt equity
ratio and the return expectations materialise?

a. Rs. 41.4 lakh

b. Rs. 71.6 lakh

c. Rs. 110 lakh

d. Rs. 75.2 lakh

Ans: b

Solution:

New savings at the end of 3 years would be:

Q15: The XY family has investments of Rs. 30 lakh in debt and Rs. 20 lakh in equity. Recently married, soon after they graduated together, they saved after tax,
Rs. 15 lakh last year. With attractive salary they both earn, they expect their annual savings to go up 20% every year. They plan to invest in the same debt equity
ratio. The financial planner expects a post tax yield of 7% on debt and 15% on equity. The family would like to go off on a world tour in 4 years. They reckon the
current cost of the tour to be USD 50000 (Rs. 50 = 1 USD). The rupee is expected to get weaker by 3% p.a., while holiday costs may appreciate 5% p.a. They also
want to buy a house in 7 years. The current cost of their preferred house is Rs. 1 crore, which is expected to go up 10% p.a. (Assume all savings are invested at
the end of the year). What should the financial planner recommend to the XY family regarding their asset allocation in the next few years?

a. Maintain

b. Consider increasing debt component

c. Consider increasing the equity component

d. Can't say

Ans: c

Solution:

The family has invested 60% in debt which generates 7% return and 40% in equity which generates 15% per year. Hence the family can consider increasing the equity
component for a better return.

Q16: The XY family has investments of Rs. 30 lakh in debt and Rs. 20 lakh in equity. Recently married, soon after they graduated together, they saved after tax,
Rs. 15 lakh last year. With attractive salary they both earn, they expect their annual savings to go up 20% every year. They plan to invest in the same debt equity
ratio. The financial planner expects a post tax yield of 7% on debt and 15% on equity. The family would like to go off on a world tour in 4 years. They reckon the
current cost of the tour to be USD 50000 (Rs. 50 = 1 USD). The rupee is expected to get weaker by 3% p.a., while holiday costs may appreciate 5% p.a. They also
want to buy a house in 7 years. The current cost of their preferred house is Rs. 1 crore, which is expected to go up 10% p.a. (Assume all savings are invested at
the end of the year). What would a prudent FP suggest to the XY family on their future goals?

a. Go on world tour immediately because costs will go up in future

b. Consider prioritising the house purchase

c. Avoid buying the house because it is an illiquid asset

d. Spend more because it will boost the economy

Ans: b
Solution:

The family should prioritize purchasing the house as the price of the house increases by 10% p.a. while the cost of world tour increases an effective of 8% p.a.