memo
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narrated_memo_slides_301.pptxMemo Assignment Corporate Finance I
Stephen J. Larson, Ph.D., CFP®
Ramapo College of New Jersey
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Can You Hear Me?
This is a narrated PowerPoint presentation
Click Slide Show on the tool bar above and then select Play from Start
If you cannot hear me, check your volume setting
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Reasoning Steps
Identify the problem or issue
Carry out an analysis
Discuss the implications and insights arising from your analysis
Recommend an action
Support your recommended action
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Assessment
It is likely your paper will be reviewed by ASB faculty raters. If so, it will be done anonymously
ASB does assessment exercises in order to maintain AACSB accreditation
Your instructor and only your instructor will assign your grade for this memo assignment
In some sections of Corporate Finance I poorly written memos and ones not following the reasoning steps will be returned to the student, no credit given
Check your with your instructor on how he/she handles memos that are poorly written and/or do not clearly follow the reasoning steps
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Example Assignment
Jenny Franklin has come to you for financial advice. Her uncle told her she could invest $5,000 per year during college and end up being a millionaire at retirement. He spoke about Traditional and Roth individual retirement accounts (IRAs), S&P 500 stock yields, her expected 10% tax rate during her college years, and the importance of a good analysis. As a professional financial advisor, write a memo to Jenny explaining what she should do?
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Memo Assignment
Your instructor will furnish you with the actual memo assignment for this course
Please turn in a document that is well-written and be sure to follow the reasoning steps as shown in the forgoing example
Please help us demonstrate that Ramapo’s students are capable of great work!
Thank You
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Memorandum
To: Jenny Franklin From: Donna Student, Financial Advisor Date: September 30, 2016 Subject: IRA Investing
I appreciate the opportunity to give you financial advice on investing during your college years. As your uncle told you, you can become a millionaire by investing just $5,000 per year into S&P 500 stocks during your college years. The problem is determining whether a Traditional IRA or Roth IRA is the right product for you.
The following analysis will help you determine whether a Traditional IRA or Roth IRA is the right product. Regardless of which investment vehicle you choose, you’d have about $3,200,000 at age sixty-seven, your normal retirement age. This is based on the average yield on S&P 500 stocks during the past eighty years (Source: NYU), a $5,000 annual contribution into an IRA for each of your four college years (total investment: $20,000), and you retiring at your normal retirement age.
$5,000*(1.1154-1)/0.115 * 1.11545 = $3,18,0696.60
So what is the difference between a Traditional IRA and a Roth IRA? With a Traditional IRA you would get to write off the contributions but the distributions during retirement would be fully taxable. With the Roth IRA, on the other hand, you would not get to write off the contributions yet the distributions during retirement would be received tax-free.
The implications of investing in a Roth IRA instead of a Traditional IRA are simple. With either IRA you’d contribute $5,000 per year during your four-year college career. That is, your total contribution would be $20,000. This $20,000 would be invested in S&P 500 stocks representing large well-known firms. At retirement (i.e. age 67), your account balance would be 3.18 million dollars given S&P 500 stocks continue to yield their historic average yield. With the Traditional IRA you would save $2,000 in taxes during your college career given a ten percent tax rate, which is typical for college students. However, during your retirement, distributions from a Traditional IRA would be fully taxable. For example, a $200,000 distribution in your first year of retirement would incur a $50,000 tax given a twenty-five percent tax rate, which is typical for retirees. If you go with a Roth IRA instead, you would give up the $2,000 tax savings during your college years in order to convert the 3.18 million dollars into tax-free cash. That is, if you took a $200,000 distribution or any other amount from a Roth IRA after age 59.5 your tax would be zero. Are you willing pay $2,000 more in taxes during the next four years in order to convert an expected 3.18 million dollar retirement nest egg into tax free income?
I recommend you fund a Roth Individual Retirement Account during your college years.
The main reason I recommend a Roth IRA instead of a Traditional IRA is straightforward; paying $2,000 extra in taxes during your college years certainly seems like a small price to pay in order to convert your retirement distributions into tax-free income. Moreover, given the large federal deficit I expect tax rates to rise during our lifetime making the Roth’s tax-free distributions even more appealing. Finally, required distributions are not required with a Roth IRA, and this gives retirees the option to build more wealth during retirement, wealth that can be passed along to heirs.
Again, thank you for coming to me for financial advice.
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1. Identify the problem or issue.
2. Conduct an analysis.
3. Discuss implications and insights that arise from your analysis.
4. Recommend a solution.
5. Support your recommendation. |
