9. Mrs. Mary Atkins, age 66, has been your firm's client for five years, since the death of her husband, Dr. Charles Atkins. Dr. Atkins had built a successful newspaper business that he sold two years before his death to Merit Enterprises, a publishing and broadcasting conglomerate, in exchange for Merit common stock. The Atkinses have no children, and their wills provide that upon their deaths the remaining assets shall be used to generate a fund for the benefit of Good Samaritan Hospital, to be called the Atkins Endowment Fund. Good Samaritan is a 180-bed, not-for-profit hospital with an annual operating budget of $12.5 million. In the past, the hospital's operating revenues have often been sufficient to meet operating expenses and occasionally even generate a small surplus. In recent years, however, rising costs and declining occupancy rates have caused Good Samaritan to run a deficit. The operating deficit has averaged $300,000 to $400,000 annually over the last several years. Existing endowment assets (that is, excluding the Atkins's estate) of $7.5 million currently generate approximately $375,000 of annual income, up from less than $200,000 five years ago. This increased income has been the result of somewhat higher interest rates, as well as a shift in asset mix toward more bonds. To offset operating deficits, the Good Samaritan Board of Governors has deter-mined that the endowment's current income should be increased to approximately 6% of total assets (up from 5% currently). The hospital has not received any significant additions to its endowment assets in the past five years.

Identify and describe an appropriate set of investment objectives and constraints for the Atkins Endowment Fund to be created after Mrs. Atkins's death.

10. Several discussion meetings have provided the following information about one of your firm's new advisory clients, a charitable endowment fund recently created by means of a one-time $10 million gift: Planning is based on a minimum total return of 8% per year, including an initial current income component of $500,000 (5% on beginning capital). Realizing this current income target is the endowment fund's primary return goal. (See "unique needs" below.) Constraints Time horizon. Perpetuity, except for requirement to make an $8,500,000 cash distribution on June 30, 2017. (See "unique needs.") Liquidity needs. None of a day-to-day nature until 2017. Income is distributed annually after year-end. (See "unique needs.") Tax considerations. None; this endowment fund is exempt from taxes. Legal and regulatory considerations. Minimal, but the prudent investor rule applies to all investment actions. Unique needs, circumstances, and preferences. The endowment fund must pay out to another tax-exempt entity the sum of $8,500,000 in cash on June 30, 2017. The assets remaining after this distribution will be retained by the fund in perpetuity. The endowment fund has adopted a "spending rule" requiring a first-year current income payout of $500,000; thereafter, the annual payout is to rise by 3% in real terms. Until 2017, annual income in excess of that required by the spending rule is to be reinvested. After 2017, the spending rate will be reset at 5% of the then-existing capital. With this information and information found in this chapter, do the following:

a. Formulate an appropriate investment policy statement for the endowment fund.

b. Identify and briefly explain three major ways in which your firm's initial asset allocation decisions for the endowment fund will be affected by the circumstances of the account.

11. You have been named as investment adviser to a foundation established by Dr. Walter Jones with an original contribution consisting entirely of the common stock of Jomedco, Inc. Founded by Dr. Jones, Jomedco manufactures and markets medical devices invented by the doctor and collects royalties on other patented innovations. All of the shares that made up the initial contribution to the foundation were sold at a public offering of Jomedco common stock, and the $5 million proceeds will be delivered to the foundation within the next week. At the same time, Mrs. Jones will receive $5 million in proceeds from the sale of her stock in Jomedco. Dr. Jones's purpose in establishing the Jones Foundation was to "offset the effect of inflation on medical school tuition for the maximum number of worthy students. "You are preparing for a meeting with the foundation trustees to discuss investment policy and asset allocation.

a. Define and give examples that show the differences between an investment objective, an investment constraint, and investment policy.

b. Identify and describe an appropriate set of investment objectives and investment constraints for the Jones Foundation.

c. Based on the investment objectives and investment constraints identified in part (b), what would be a comprehensive investment policy statement for the Jones Foundation to be recommended for adoption by the trustees.