What are their expenses for the next year

Reference no: EM132188564

Question - You have recently settled into the Ozarks to set up your financial advisory business. You meet Ruth (19 yrs old) and Wyatt (18 yrs old) Langmore, two cousins who have decided to combine their assets together to support the remainder of their family. They miraculously generated a sum of $3,200,000. Ruth currently is the operating a dance studio and earns $25,000 this past year while Wyatt is still in high school and manages to scrape by with $5,000 this past year. The current income pays off their expenses, leaving 15% of whatever income they have after taxes, which they believe will stay at that rate. The family currently has about $8,000 in loan shark debt at about 20% interest. Furthermore, Wyatt plans to go to college during the next year which will balloon expenses by another $30,000 a year for the next four years.

The Langmores have no savings prior to this due to an obscure relative disappearing with all the money. You take some time to interview them to college a little information which can be broken down into the following excerpts:

We don't really want to change our lifestyles, as we would like to avoid the unwanted attention.

Given what has happened to our savings previously, we are not aiming for high returns and we would like to minimize volatile investments.

We would like the portfolio to at least combat inflation.

We would both like to continue to work despite the new found money. We don't really see ourselves retiring until 65+.

Our income tax level is around 21.5% while our capital gains is taxed at 35%.

If possible, we would like to fund college for some of our cousins who should be entering college in 15 years.

1) Let's assume that inflation is roughly 3.2%. Now calculate the following:

1a) What are their expenses for the next year?

1b) What is their net income for the next year?

1c) What is the required return on the portfolio for the next year?

2) Determine the Langmore's time horizon, liquidity needs for the next year (hint, part of this is a number related to expenses), and legal, regulatory and tax considerations. Assume the details still hold from part (i) and living expenses have not increased as they did in part (ii).

Reference no: EM132188564

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