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McMaster Undergraduate Case Study January 2020 Case Structure and Scenarios Scenario: Terry has just started a 4-year program at prestigious McMaster University, in her program of choice no less –a Bachelor of Commerce through the DeGroote School of Business. However, her financial situation is less than ideal – she has little savings, no part time job, and most importantly, does not have a plan. At this point, it is unclear how she will be able to afford school, necessities, and her rapidly growing social life. The student’s challenge is to help Terry build the components of a comprehensive financial plan to guide her through University and beyond. Your team will need to consider her current financial situation, the nature of her program of choice, lifestyle, priorities and future goals. Case notes on ‘Terry’ The details of the student’s finances will be provided, including strengths and weaknesses. This will include the estimated cost of her program and various expenses as well as support available to her. Part of the accounting, which will be relatively straight forward, will be recognizing the need to prioritize expenses. A biosketch will be provided to help student’s identify with the character and provide a personality of the case subject. This will be accompanied by a list of goals and priorities.

Sample Financial Details Program: Bachelor of Commerce Duration: 4 years Tuition Fees: $6,000 Current Rent and Utilities: $500 per month Support from Parents: $1,000 per year Annual Scholarship: $2,000 Entrance Scholarship: $1,500 Mandatory Costs: $500 per month Discretionary Costs: $1000 per month

Breakdown of Annual Costs 18% 35%

17%

17%

6% 4%

3%

McMaster Undergraduate Case Study January 2020

Case Structure The case is differentiated for each HUB and Section along the following dimensions: HUB: Future Goals (samples)

Pursue Graduate School (Hub 1)

SECTION: Financial Focus Borrowing and Debt (Streams 1 to 3) Cashflow and Saving (Streams 4 to 6)

Exchange (Hub 2)

Income (Streams 7 to 9)

The separate dimensions will challenge students to think along different strategic lines and explore in depth the challenges of financial planning with respect to current and future goals. Using two dimensions with 3 variables provides for 9 distinct scenarios, but with overlapping and synergistic themes. Each section will receive a 1-page primer on additional details relevant to their focus and dimensions, complete with specific problems to address and possible options/scenarios. Collectively, the solution(s) to this case will yield a comprehensive approach to a financial plan, complete with ideas on how challenges can be addressed (fintech, banks, etc). Key Addition over 2020: ‘Fast-Forward’ scenario that challenges students to take the results of decisions, combined with new information, and assess their situation 2-years after graduation. Key learnings include goal setting, tax planning, and risk.

McMaster Undergraduate Case Study January 2020

Financial Functional Areas Included: 1. 2. 3. 4. 5.

Earning – determinants of wages and take home pay. Consuming – budgets and spend management. Saving – factors to maximize accumulation. Investing – investment types, risk and return. Borrowing/debt management – relationship between loan and future payments. 6. Taxes – considerations for students and planning 7. Go-to Information sources – recognizing appropriate sources and advice.

Central Themes for the Case • Planning for Risk • Sources of information • Seeking advice • Financial planning • Goal setting • Milestones • Return on investment • Organization

Group Subject Areas Break Down and Case Structure - Sample Section 1: Debt HUB 1

Graduate School

Section 2: Cashflow/Saving

Section 3: Income

Section 1: Debt HUB 2

Exchange Section 2: Cashflow/Saving

Section 3: Income

McMaster Undergraduate Case Study January 24, 2020 Summary Terry Morrison has just started a Bachelor of Commerce in the DeGroote School of Business, a 4-year degree at the prestigious McMaster University. However, her financial situation is less than ideal. She has limited savings, no part-time job, and most importantly, does not have a plan. At this point, it is unclear how she will be able to afford school, necessities, and her rapidly expanding social life. The Challenge Your challenge is to help Terry build the components of a financial plan to guide her through University and beyond. You will need to consider her current financial situation, the nature of her program, lifestyle, priorities and future goals. This case provides key sections to guide you through the development of a financial plan. This includes: Case Sections A. Student Profile - Terry’s interests and goals B. Case Financials - A summary of Terry’s finances C. Case Scenario - Unique challenges for completing your plan

Your Objectives 1. Identify Terry’s Goals (Section A) 2. Prepare a realistic Preliminary Budget using the Case Financials (Section B), other sources available online, and your own experiences. 3. Develop a Strategy to Finance University Expenses and Update your Budget based on your choices in Section C. 4. Identify Strategies and Tools to Stay on Budget - Online Resources (http://www.degrootecase2020.com)

Report Structure You have 7 minutes to present your strategy to the judging panel followed by 1-2 minutes of questions. Approximate allocations are as follows: - Identification of Goals and Needs - 2 minutes - Strategy to Finance, Choice of Alternatives and Budget - 3 minutes - Strategies to Stay on Track– 2 minutes

A. Student Profile – Grad School (Hub 1) Terry Morrison is a Torontonian. For 18 years she has lived in a downtown suburb with her parents, Larry and Sherry, and her older brother Barry. Her parents have lived in Toronto all of their lives. Her brother lives at home while attending the University of Toronto (currently in 3rd year). Considering these roots, it was a surprise to Terry’s family when she announced that she would be moving to Hamilton to attend McMaster University in September 2020. But, to Terry, DeGroote seems like a perfect fit for her. For as long as she can remember, Terry has had a passion for advertising and marketing. While most students of her age watch TV shows or YouTube hilarious cat videos, she watches media for the commercials. Her goal is to, one day, work in advertising, aspiring to bring fresh ideas to the digital strategies of long-established, big-name brands. And in this, she is poised to succeed - she is creative, hard-working, and eager to learn new things. Priorities in University University is a time of education and development. But it is also an opportunity to expand one's social life and breadth of experience. Terry was a good student in high school, graduating with an average of 91%. She would like to maintain these marks in University but knows she will need to work hard to keep her grades at this level. She expects to spend 20-30 hours each week attending class and completing schoolwork – a major commitment. However, she still plans to dedicate significant time to professional development, gaining practical career experience, and extracurricular activities while in school. Preferring her own place and wanting to fully explore the burgeoning city of Hamilton, Terry plans to live off-campus for the duration of her University journey. To minimize time spent in transportation, she has chosen to live in a 1-bedroom student apartment close to McMaster in her first year. She plans to move to a trendy downtown Hamilton neighborhood in subsequent years. Terry will stay in Hamilton throughout the summer break, working to save up for the following school year. Though Terry is excited to strike out on her own in a brand-new city, she expects to head home at least once a month to visit Larry, Sherry and Barry, and of course, her beloved dog, Harry. She will not have a car throughout University, and instead, plans to use public transit to reduce her costs (and be ‘green’). Terry had several jobs throughout high school working in the service and retail industries. If possible, she would prefer not to have a part-time job while in school – but that may be wishful thinking. If she has to work, she wants to work ten hours per week during the school semester but is happy to work full-time (40 hours per week) in the summer. Terry has never had any debt and is relatively new to the whole concept. She is comfortable with taking on a loan to support her education if it is needed. However, she would like to minimize debt by controlling her expenses and working when possible. In her spare time, Terry enjoys playing hockey, hiking with her dog, and learning to cook. Her growing skill as an amateur chef will allow her to rely on home-cooked meals during school. This said, she is not planning to live with limitations and wants to experience Hamilton’s famed culinary scene.

A. Student Profile – Grad School (Hub 1)

Key Goals Goal 1 Terry is expecting to like University. So much so, that she fully expects to take a graduate degree following her undergraduate career – maybe an MBA, maybe a Masters in Advertising, maybe a College Diploma in Digital Media. While this may take 4 additional years (or more), Terry wants to ensure her finances at the end of her undergraduate degree will be able to support these ambitions. Some preliminary research has indicated that these programs can cost a student as much as $20,000 – $30,000 per year. Terry sets a goal of having $10,000 available in her bank account after 4 years for contribution to her next degree. Is this possible? How will she need to tweak her Financial Plan to realize this goal? Goal 2 Terry strives to be an excellent student. To achieve this, she will need to put time into her studies. But Terry has competing interests. She must work to make enough money to afford tuition and her expenses, but she is also eager to have plenty of spare time for other activities. Ideally, she would like to avoid working during the school semester altogether. Is it possible to work only 4 months per year during the summer without acquiring debt? If not, could she avoid working in her first year of school so that she has time to acclimatize to her new environment? What strategies could she take to make this possible? How does this align with her other goals?

Objective 1 Identify Terry’s goals for her time at McMaster. This will help guide your financial planning decisions in the next sections.

B. Financial Situation Outflows (Expenses) Terry plans to complete a 4-year degree - a Bachelor of Commerce at McMaster University - starting in September 2020. Tuition and supplementary fees for each year will be paid as follows: • •

50% due in September 2020 and the remaining balance due in January 2021.

A city bus pass is included in her fees, which covers the cost of local transportation within Hamilton, but not outside of the city. Terry will need to purchase a laptop for September, which she expects to last the duration of her degree. What other expenses does Terry need to account for and how much should she budget for each item? Prepare a comprehensive monthly budget of expenses for each year, taking into consideration recurring monthly costs as well as one-time and lump sum payments (i.e., tuition).

Inflows Terry has saved $5,000, now in her chequing account, to contribute to her expenses. Mr. and Mrs. Morrison, Terry’s parents, collectively make $130,000 annually. They are unable to cover all of her expenses while she is in University. However, they have offered to provide up to $500 per month to contribute to her housing costs. As a reward for her stellar performance during high school, Terry has received two scholarships. She expects to maintain a level of academic performance that allows for the renewal of these awards as follows: •

A McMaster Entrance Scholarship of $1,000 per year, renewable for the first 2 years if she maintains her marks above 80%.

•

An external scholarship for community service in high school totaling $1,500 per year renewable for 4 years if she maintains her marks above 80%.

Terry does not yet have any other income.

B. Financial Situation Objective 2 Using the details above, and with reference to her goals, prepare a preliminary monthly and annual Budget for Terry for all four years of school. This should take into account the: • • • •

Starting balance/savings Estimated amount of expenses (outflows) Prospective cash inflows Ending balance (surplus or deficit)

In her current situation, can she afford the expenses of her Undergraduate degree?

Sample Summary Annual Budget Year 1 Starting Balance

$5,000

Outflows

$?

Inflows

$?

Ending Balance

$?

Year 2

Year 3

Year 4

Template budget as an excel file is available at: (http://www.degrootecase2019.com)

TIP Don’t let the number scare you – this case is a question of strategy, planning, and execution. The numbers are here to give you context and the ability to demonstrate the effectiveness of your team’s plan. An optional template for keeping track of cashflow and budget can be found in the accompanying excel file. But, be sure to consider the numerous expenses faced during school (utilities, transit, food, etc.) as it all adds up.

C. Scenario: Maximizing Income - ‘It’s in the Money’ Taking stock of her financing options during University, Terry determines the following: Savings After a summer of hard work, Terry has managed to save $5,000, which she plans to put towards her 2020 expenses. Debt Terry has qualified to receive two types of debt and has opted to accept OSAP only. 1. An OSAP Loan of $7,100, expected to be the same amount every year. The loan is provided to her installments twice a year, 60% in September and 40% in January. The debt carries an annual interest rate of 6.45% (prime +2.5%), but it is only charged after she graduates. Thus, after 4 years, she will have a total obligation of $28,400. The payment of the loan begins 6 months after she graduates. 2. A Line of Credit from the local credit union for $20,000. The LOC carries an annual interest rate of 4.95% (prime +1%). With a line of credit, interest is only charged when she uses the funds.

Objective 3: Strategy to Finance - Income After reviewing her savings and debt options, Terry suspects she will need to work over the next 4 years to have enough money to pay for her expenses. However, she wants to be sure she has sufficient time to attend class, maintain her grades, and have enough free time to enjoy her social life and non-academic activities. There are only so many hours in a week… Terry has identified the following options for earning money over the course of school. She needs to carefully consider which option allows her to best meet her goals while providing her with the necessary income to meet her financial obligations.

1. Serving Job. Terry has experience working in the service industry – fast food, sports bars, music venues, etc. She expects to be able to easily get a job and has already submitted a resume to a trendy downtown restaurant that looks to be a lot of fun. It will certainly offer a different atmosphere than the University. With tips and wages, she expects to be able to earn $25 per hour and have a job during the school semester and all summer. She plans to work 10 hours per week during the school semester and 40 hours per week in the summer.

C. Scenario: Maximizing Income - ‘It’s in the Money’ 2. Media and Advertising Part-Time Placement. Terry found an advertisement for a local media agency looking for entry-level interns. This is of great interest as, at this time, it is precisely where she wants to see her career lead. The job could offer a great experience and help build her network, all while getting paid. The posting states that the position requires 20 hours per week year-round and offers an entry-level salary of $15. While this is just above minimum wage, she knows this is typical for the industry and that there is potential to grow. 3. Commerce Internship. The DeGroote commerce program offers the potential of a paid internship placement after the third year. This provides an opportunity to gain valuable professional experience while also earning money on a full-time basis. The average annual salary for interns is $39,000. In order to complete the internship, Terry’s program will be expanded to 5 years, instead of 4. This will delay her graduation, and add another year of living expense to her budget, but of course, it comes with a significant upside. The program is highly competitive, and while she is a good student, she knows acceptance is not guaranteed. In addition, she may not get a placement in her desired field of advertising. Perhaps prior professional experience in this field could help her chances… Decisions Terry recognizes that she cannot take all of these opportunities at the same time. However, there may be an opportunity to take different approaches in different years of school. As she looks to calculate the potential earnings for each option, she suddenly remembers her father Larry lamenting about taxes and the Canadian Revenue Agency. Will she have to pay taxes? If so, how much? What will her netincome be? 1. Provide a strategy for Terry to earn sufficient income to cover her cash needs during University while also allowing her to achieve her other goals. Be sure to include the number of hours worked, the type of job, and the potential for any savings. Remember, Terry would prefer not to use the Line of Credit available and does not have access to any more debt, savings, bursaries, etc., so her earnings will be crucial to cover her costs. Be sure to consider Terry’s Key Goals from Section A. Update your budget based on your decisions.

DeGroote 24-Hour Case – 1EO3/1AB3 Rubric – Key Themes

Categories for Evaluation: 1. Organization (includes: agenda, introduction and conclusion) 2. Presentation Content (includes: theory and topic explanation) 3. Identification of Goals and Needs 4. Choice of Scenario Alternatives 5. Effective Use of Presentation Aids 6. Delivery and Spontaneity (vocal qualities and intonation) 7. Creativity 8. Transition Between Speakers (all students must engage in some way with the presentation delivery – note: slide changing is not considered sufficient participation)

DeGroote School of Business – Winter Term 2020...