The Zimmer Case Harvard Case Solution & Analysis

Case 1

Today’s date is December 31, 20XX, and Bonita Zimmer has stopped by your office for her year-end annual financial planning review. The following narrative provides important details about Bonita.

Bonita just turned 30 years of age. She lives in a house that she purchased three years ago for $110,000, rightbefore housing prices began to skyrocket. She was fortunate to purchase the home with $18,000 in downpayment money received from her father (who is married) and a loan for the remainder. She was able to obtain a 6.5% 30-yearmortgage.

Bonita is a hard worker and good saver. Over the past eight years—since graduating from college—she has accumulated a nice-sized nest egg. Table VI.1 summarizes her asset and liability situation.

Bonita has been saving for an emergency fund. Her goal is to maintain a liquid account balance equal to six months of total expenses. Table VI.2 summarizes Bonita’s income and expense situation. Note that Bonitalives in an income tax-free state.

The Zimmer Case Harvard Case Solution & Analysis

Case Questions

1. If Bonita sells her current residence for full fair market value (excluding commissions and closing costs), and shepurchases a new residence for $180,000 in the same calendar year, the amount of proceeds subject to capital gains taxis
2. $7,000 b. $28,296
3. $187,000 d. $257,000

2. Which of the following statements is true assuming that the money Bonita received for the down payment on herhouse from her father was a gift rather than aloan?
   1. Bonita must pay a gift tax on the amount that exceeds the gift tax annual
   2. Herfathershouldhavefiledagift-splittingelectionwiththeIRS toavoidincurringagift

• Bonitashouldhave fileda gift-splittingdeclarationwiththeIRStoavoidincurringa gift

1. The basis in the house is increased by the amount of any taxes paid on the down payment

1. IIonly
2. I and IIIonly
3. II and IVonly
4. III and IVonly
5. I, III, and IVonly
6. Bonita is concerned that she could be overextended on her monthly mortgage payment. Do you agree withher?
7. Yes, because her total debt-to-income ratio exceeds the accepted benchmark of 36% of gross
8. No, because her monthly housing cost-to-income ratio is less than the accepted benchmark of 28% of gross
9. Yes, because her monthly housing cost-to-income ratio is greater than the accepted benchmark of 28% of gross
10. No, because her monetary assets are greater than six months of total expenses, which allows her to overextend her monthly mortgage
11. Which of the following statements is correct regarding Bonita’s cash flowsituation?
12. Her level of discretionary cash flow, if used for savings, is below the recommended benchmark average of 10% of gross
13. Her level of expenditures for principal, interest, tax, insurance (PITI), and other debt payments exceeds the recommended maximum of 36% of gross
14. She needs to save additional money in liquid assets to achieve her six-month emergency fund
15. Both (a) and (c) arecorrect.
16. Answers (a), (b), and (c) arecorrect.
17. Bonita has been dating Jason for nine He has proposed marriage. If Bonita accepts the proposal and they purchase a home together after they get married, which method can they use to title the property that will provide automatic survivorship rights, assuming they live in a non-community propertystate............................

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