Solutions: Case 1 (Roger)

Q1

B) professional requirement under Practice Guidelines of FPSB India

Q2

D) Identify other issues that may potentially impact Rogers ability to achieve financial goals

Q3

C) Rs. 75 lakh (approx.)

(Solution given below)
Current value of the desired house
Expected value of new house after 5 years considering 7% appreciation
Existing market value of the occupied house
Expected market value in five years considering 5% appreciation
Loan outstanding on existing home to be settled
Principal value of 15-year loan (availed in April 2012)
EMI considering 10% p.a. interest for first three years
Loan outstanding as at end March, 2015
The average rate on loan 1.5% above the Repo rate of 6.5%
Revised EMI (average) over the next 5 years
Loan outstanding as at end March, 2020 (five years from today)
Amount to be set aside for tax liability, duties and furnishing
Amount that can be utilized from sale proceeds to buy new house
Amount to be financed for new house

10,000,000
14,025,517
7,500,000
9,572,112
1,700,000
18,268
1,528,627
8.00%
16,547
1,061,622
2,000,000
6,510,490
7,515,027

Q4

A) They must take Mortgage Redemption Insurance or an equivalent term insurance to cover outstanding loans

Q5

D) Rs. 100 lakh (approx.)

(Solution given below)
Current household expenses
Annual expenses in current terms
Inflation rate
Return on Debt MF schemes
Current age of Angela
PV of 80% of current expenses required till Angela's age of 55 years
Household expenses (80% of current) in the 55th year of Angela
PV at Angela's age of 55, of 60% of then living expenses for remaining 25 years
PV of post-55 years expenses today
Life cover required to the extent of covering living expenses as proposed
Additional insurance cover required
(Approximate)

40,000
480,000
5.00%
7.00%
31
7,481,764
1,238,438
14,950,115
2,947,365
10,429,129
10,129,129
Rs. 100 lakh

Rs.
Rs.
years
p.a.
Rs.
Rs. p.m.
Rs.
% p.a.
Rs. p.m.
Rs.
Rs.
Rs.
Rs.

Rs. p.m.
Rs. p.a.
p.a.
p.a.
years
Rs.
Rs.
Rs.
Rs.
Rs.
Rs.

10000000*(1+7%)^5
7500000*(1+5%)^5

PMT(10%/12,15*12,-1700000,0,0)
PV(10%/12,(15-3)*12,-18268,0,0)
PMT(8%/12,(15-3)*12,-1528627,0,0)
PV(8%/12,(15-3-5)*12,-16547,0,0)
9572112-1061622-2000000
14025517-6510490

PV((1+7%)/(1+5%)-1,55-31,-480000*80%,0,1)
480000*80%*(1+5%)^(55-31)
PV((1+7%)/(1+5%)-1,80-55,-1238438*60%,0,1)
14950115/(1+7%)^(55-31)
7481764+2947365
(Money back policy of Rs. 3 lakh reduced)

Q6

A) Rs. 140 lakh

(Solution given below)
Current expenses
Rate of return to invest claim proceeds and other assets
Inflation
Living Expenses
80% of present expenses for the next 25 years
60% of present expenses for subsequent 30 years
Higher Education Expenses
Mark: Rs. 4 lakh p.a. for 4 years required after 14 years at 8% escalation

480,000 Rs. p.a.

7.50% p.a.
5.00% p.a.
7,343,030 Rs. (PV):1
3,481,985 Rs. (PV):2
1,719,344 Rs. (PV):3

Stephanie: Rs. 4 lakh p.a. for 4 years required after 17 years at 8% escalation
Loans outstanding
Housing loan
Car loan

1,528,000 Rs. (PV):5

162,000 Rs. (PV):6

Total corpus required to meet the living and HE expenses and loans (PV:1 to 6)
Financial Assets:
Cash in bank accounts and FDs
Equity shares and Equity MF scheme investments
PPF A/c balance
Total of Financial Assets

15,977,806 Rs. (PV): 1 to 6

Therfore, Life cover needed at this stage for Roger

13,887,806 Rs.
Rs. 140 lakh

(Approximate)
Q7

1,743,447 Rs. (PV):4

B) Rs. 3.20 crore (approx.)

(Solution given below)
Monthly household expenses
Required Annual expenses in the first year after retirement (age 58 of Roger)
Rate at which corpus is invested
Inflation
PV of expenses required from Roger's age of 58 to 70
PV (on retirement) of Provision of Gifts and Charity at age 70
Additional Rs. 10,000 p.m. (current cost) at Roger's age of 70
Additional Annual expenses to be provided for medical care at Roger's age of 70
Basic Household expenses at Roger's age of 70
Total Annual expenses required at Roger's age of 70
Corpus (at 70 of Roger) for expenses required from age 70 to 75 of Roger
PV of this sum (computed at Roger's age of 70) on Roger's retirement (at age 58)
Expenses further curtailed to 70% for Angela (Roger dies at 75, Angela survives at 77)
Corpus at Roger's age of 75 (death) for next three years of Angela's survival#
Corpus (at 58) for expenses required at Roger's age 75 for Angela's survival
Total Corpus required at age 58 of Roger

PV((1+7.5%)/(1+5%)-1,25,-480000*80%,0,1)
PV((1+7.5%)/(1+5%)-1,30,
480000*60%*(1+5%)^25,0,1)/(1+7.5%)^25
PV((1+7.5%)/(1+8%)-1,4,
400000*(1+8%)^14,0,1)/(1+7.5%)^14
PV((1+7.5%)/(1+8%)-1,4,
400000*(1+8%)^17,0,1)/(1+7.5%)^17

420,000
1,180,000
490,000
2,090,000

40,000
1,383,022
6.5%
5.0%
15,369,121
5,871,036
73,920
887,039
2,483,708
3,370,747
16,385,620
7,696,045
3,011,415
8,907,600
3,053,637
31,989,838

PV1+PV2+PV3+PV4+PV5+PV6

Rs.
Rs.
Rs.
Rs.

Rs. p.m.
Rs.
p.a.
p.a.
Rs. (corpus:1)
Rs. (corpus:2)
Rs. p.m.
Rs.
Rs.
Rs.
Rs.
Rs. (corpus:3)
Rs.
Rs.
Rs. (corpus:4)
Rs. (corp 1 to 4)

15977806-2090000

12*40000*70%*(1+5%)^(58-29)

PV((1+6.5%)/(1+5%)-1,12,-1383022,0,1)
12500000/(1+6.5%)^12
10000*(1+5%)^(70-29)
73920*12
1383022*(1+5%)^(70-58)
887039+2483708
PV((1+6.5%)/(1+5%)-1,5,-3370747,0,1)
16385620/(1+6.5%)^(70-58)
3370747*(1+5%)^5*70%
PV((1+6.5%)/(1+5%)-1,3,-3011415,0,1)
8907600/(1+6.5%)^(75-58)
#Angela (life exp. 80) survives Roger by 3 years

Q8

A) Rs. 57 lakh; 44% curtailment

(Solution given below)
Corpus worked out in the Initial Scenario:
Initial rate at which corpus is invested
Initially assumed Inflation rate
Current house hold expenses
Household expenses budgeted for retirement after 29 yrs (Rogers' age 58)
Age of Angela on Roger's retirement (Angela is senior by 2 years )
Life expectancy of Angela
Retirement corpus to last (out of which last 3 years further reduced to 70%)
PV of expenses: Initial 17 years (till the survival of Roger up to age 75, Angela 77)
PV of expenses:Balance 3 years (Angela's living expenses from age 77 to 80)

6.5%
5.0%
480,000
1,383,022
60
80
20
21,039,890
2,250,048

Initially worked out corpus

23,289,939 Rs.

Stress test: lower yield, higher inflation, increased longevity

Retirement corpus to last (Roger's 80 with now coincide with Angela's 82)
Revised Yield from investing corpus
Revised Rate of inflation
Retirement corpus required
Cushion built in the corpus
Alternately, the reduction sought in post-retire expenses (2nd Scenario)
Required expenses to be withdrawn in the 1st year after retirement
Pre-retirement expenses (at the given rate of inflation up to retirement)
Curtailment in expenses
Q9

22
6.00%
5.50%
28,965,848
5,675,909
1,112,016
1,975,745
43.72%

p.a.
p.a.

Rs. p.a.
Rs. p.a.
years
years
years
Rs.
Rs.

years
p.a.
p.a.
Rs.
Rs.

480000*70%*(1+5%)^29

PV((1+6.5%)/(1+5%)-1,17,-1383022,0,1)
PV((1+6.5%)/(1+5%)-1,3,
1383022*70%*1.05^17,0,1)/(1+6.5%)^17
21039890+2250048

80-58

PV((1+6%)/(1+5.5%)-1,22,-1383022,0,1)
28965848-23289939
1383022*(23289939/28965848)
480000*(1+5%)^29
1-(1112016/1975745)

C) This is a play on long duration with expected moderate trend in interest rates, thus scheme return though capital appreciation is expected.

Q10

Q11

B)Mark Rs. 49.4 lakh, 19% shortfall; Stephanie Rs. 62.2 lakh, 21% shortfall
(Solution given below)
PPF account balance as on 31-March-2015
Account's initial maturity (opened in Dec-2009) is 1-April-2025
Number of subscriptions from 31-Mar-2016 to 31-Mar-2025
Number of subscriptions from 31-Mar-2026 to 31-Mar-2035 (2 extensions)
Rate of interest assumed throughout
Maximum subscription at the end of every financial year (for 20 years)
Accumulated balance on 31-March-2035 (Mark's age 24, Stephanie' age 21)
The account is maintained without subscription for 5 more years
Accumulated balance on 31-Mar-2036 (Mark's age 25 years)
50% of accumulated amount withdrawn for Mark's marriage expenses
Estimated expenses (current Rs. 10 lakh, escalating by 9% p.a.) for Mark
Shortfall in meeting Mark's marriage expenses
Remaining amount in PPF accumulated till 31-Mar-2039: Stephanie's marriage
Estimated expenses (current Rs. 10 lakh, escalating by 9% p.a.) for Stephanie
Shortfall in meeting Stephanie's marriage expenses
D) Rs. 120,600
(Solution given below)
The current cost of annual vacation (1-April-2015); Roger's age 29
Cost escalation provisioned in the vacation expenses
Lump sum invested on 1-April-2015 in the fund (Roger's age 29)
Total annual investments from 1-April-2016 to 1-April-2043 (till Roger is 57)
Total withdrawals from 1-April-2017 to 1-April-2044 (till Roger is 58)
Total investment peiod (1-April-2015 to 1-April-2044)
Return expected from Asset allocation in the first 10 years (Initial + 9 investments)
Return expected from Asset allocation in the second 10 years (investment 10 to 19)
Return expected from Asset allocation in the balance period (investment 20 to 28)
Vacation Expenses enumerated
Vacation expenses to be drawn in the very first year, i.e. on 1-April-2017
PV of expenses (first 8 years, 1-Apr-2017 to 1-Apr-2024) drawn from 11% return
PV as on 1-April-2015
Likely vacation expenses on 1-April-2025
PV of expenses (next 10 years, 1-Apr-2025 to 1-Apr-2034) drawn from 9.5% return
PV as on 1-April-2015
Likely vacation expenses on 1-April-2035
PV of expenses (next 10 years, 1-Apr-2035 to 1-Apr-2044) drawn from 8% return
PV as on 1-April-2015
Total PV of all vacations provisioned (Pv:1 to 3)
Accumulation:
Initial sum invested (1-April-2015) in the needed fund for vacation
Remaining amount to be provisioned by way of annual investments
Let us assume that initial investment installment (first 9) be
PV of first 9 investments of Rs. 100 from 1-Apr-2016 to 1-Apr-2024
Annual investments in the second 10-year period (from 1-Apr-2025 to 1-Apr-2034)
PV of next 10 investments of Rs. 200 from 1-Apr-2025 to 1-Apr-2034
Annual investments in the remaining period (from 1-Apr-2035 to 1-Apr-2043)
PV of last 9 investments of Rs. 400 from 1-Apr-2035 to 1-Apr-2043
PV of all 28 Annual Investments as provisioned
Amount of Annual Investment equivalent to the assumption of Rs. 100

490,000 Rs.
10
10
8.00% p.a.
150,000 Rs.
9,148,164 Rs.

FV(8%,20,-150000,-490000,0)

9,880,017
4,940,008
6,108,808
19.13%
6,222,988
7,911,083
21.34%

Rs.
Rs.
Rs.

9148164*(1+8%)
9880017/2
1000000*(1+9%)^21
1-(4940008/6108808)
(9880017/2)*(1+8%)^3
1000000*(1+9%)^24
1-(6222988/7911083)

150,000
7.00%
1,000,000
28
28
29
11.00%
9.50%
8.00%

Rs.
p.a.
Rs.
years
years
years
p.a.
p.a.
p.a.

171,735
1,212,540
984,125
295,073
2,665,310
938,681
580,453
5,568,547
791,354
2,714,160

Rs.
Rs.
Rs. (PV:1)
Rs.
Rs.
Rs. (PV:2)
Rs.
Rs.
Rs. (PV:3)
Rs.

1,000,000
1,714,160
100
553.70
200
484.27
400
383.51
1,421.49
120,589

Rs.
Rs.
Rs.
Rs.
Rs.
Rs.
Rs.
Rs.
Rs.
Rs.

Rs.
Rs.

PV((1+11%)/(1+7%)-1,8,-171735,0,1)
1212540/(1+11%)^2
150000*(1+7%)^10
PV((1+9.5%)/(1+7%)-1,10, -295073,0,1)
2665310/(1+11%)^10
150000*(1+7%)^20
PV((1+8%)/(1+7%)-1,10, -580453,0,1)
5568547/((1+11%)^10*(1+9.5%)^10)
984125+938681+791354

2714160-1000000
PV(11%,9,-100,0,0)
PV(9.5%,10,-200,0,1)/(1+11%)^10
PV(8%,9,-400,0,1)/((1+11%)^10*(1+9.5%)^10)
553.7+484.27+383.51
(1714160/1421.49)*100

Q12

B) Rs. 16.70 lakh

(Solution given below)
Higher Edu. expenses, in current terms, of Mark (age 4) at his age 18, 19,20 & 21
Higher Edu. expenses, in current terms, of Stephanie (age 1) at her age 18,19,20,21
Cost escalation for higher education expenses
Expenses drawn from a fund investing in Risk Free instruments at
Accumulation period through monthly investments in Asset Allocation Fund

Rs. p.a.
Rs. p.a.
p.a.
p.a.
years

Present Value of Higher Education Expenses after 12 years

PV of Higher Edu. Expenses of Mark at his age of 18 (after 14 years) in Risk Free
PV of such expenses after 12 years when drawn from Risk Free investments
PV of Higher Edu. Exp. Of Stephanie at her age of 18 (after 17 years) in Risk Free
PV of such expenses after 12 years when drawn from Risk Free instruments
Total PV of Higher Edu. Exp. After 12 years in Risk Free instruments

4,799,731
4,231,727
6,046,278
4,413,063
8,644,790

Rs.
Rs. PV:1
Rs.
Rs. PV:2
Rs. PV:(1+2)

Accumulation
Aggressive Asset Allocation (year 1 to 7)
Return expectation (aggressive)
Monthly investment
Accumulation in 7 years
Moderate Asset Allocation (year 8 to 12)
Return expectation (aggressive)
Monthly investment
Accumulation in 12 years

7
12.00%
20,000
2,576,027
5
9.00%
40,000
6,974,397

years
p.a.
Rs.
Rs.
years
p.a.
Rs.
Rs.

Shortfall expected after 12 years

Q13

400,000
400,000
8.00%
6.50%
12

C) future capital gains tax on assets transferred to trust could be lower

-1,670,393 Rs.

PV((1+6.5%)/(1+8%)-1,4,-400000*(1+8%)^14,0,1)
4799731/(1+6.5%)^2
PV((1+6.5%)/(1+8%)-1,4,-400000*(1+8%)^17,0,1)
6046278/(1+6.5%)^5
4231727+4413063

FV((1+12%)^(1/12)-1,12*7,-20000,0,1)

FV((1+9%)^(1/12)-1,12*5,-40000,-2576027,1)
6974397-8644790

Q14

B) Rs. 12,100
(Solution given below)
Number of shares
Purchase price
Sales price

500 nos.
225 Rs. Per share
460 Rs. Per share

Alternative 1
Cost of acquisition
Sales consideration
Less: Indexed cost of acquisition
Long-term capital gain
Tax @ 20%
Add: Education cess @ 3% (2% + 1%)
Tax liability from capital gains
Tax liability rounded off

112,500
230,000
154,920
75,080
15,016
450
15,466
15,470

Rs.
Rs.
Rs.
Rs.
Rs.
Rs.
Rs.
Rs.

500*225
500*460
(500*225)*1081/785
230000-154920
75080*20%
15016*3%
15016+450
ROUND(13616,-1)

Alternative 2
Sales consideration
Less: cost of acquisition (without indexation)
Long-term capital gain
Tax @ 10%
Add: Education cess @ 3% (2% + 1%)
Tax liability from capital gains
Tax liability rounded off

230,000
112,500
117,500
11,750
353
12,103
12,100

Rs.
Rs.
Rs.
Rs.
Rs.
Rs.
Rs.

500*430
500*225
230000-112500
117500*10%
11750*3%
11750+353
ROUND(10336,-1)

Note: An assessee can choose lower of the two alternatives for payment of capital gains tax
liability

Q15

A) Rs. 57,600
(Solution given below)
For 800 shares:
Sale consideration (Date: 20th October 2014)
Less: Cost of acquisition (Date: 10th May 2014)
Short term capital loss (STCL)
Dividend received
Whether Section 94(7) is applicable
For 200 shares:
Sale consideration (Date: 20th December 2014)
Less: Cost of acquisition (Date: 10th May 2014)
Short term capital loss (STCL)
Dividend received
Whether Section 94(7) is applicable
Computation of income from capital gains
LTCG on sale of gold
Less: STCL on sale of 800 shares
Less: STCL on sale of 200 shares
Net LTCG for AY 2015-16

Note: As per Section 94(7), dividend stripping is applicable only if:

1) Shares or MF units are bought within 3 months of dividend record date
2) Shares are sold within 3 months of dividend record date/MF units are sold within 9
months of dividend record date
3) There is short term capital loss (STCL) on such sale
4) Dividend received is less than the STCL on sale
If it is applicable, the amount of dividend received is deducted from the total STCL figure
for shares/MF units sold. Balance will be either set-off against capital gains, if any, or
carried forward to next assessment year.

29,600
44,800
(15,200)
4,000

Rs.
Rs.
Rs.
Rs.

800*37
800*56
29600-44800
(0.50*10)*800

4,000
11,200
(7,200)
1,000

Rs.
Rs.
Rs.
Rs.

200*20
200*56
4000-11200
(0.50*10)*200

76,000
(11,200)
(7,200)
57,600

Rs.
Rs.
Rs.
Rs.

Yes

No

(15200)+4000
76000+(11200)+(7200)