Question
Joe and Sarah Finnegan are both 62 years old and live in Johannesburg. They are retired and have a combined investable net worth of ZAR
Joe and Sarah Finnegan are both 62 years old and live in Johannesburg. They are retired and have a combined investable net worth of ZAR 2 million, the bulk of which was inherited from Sarahs fathers estate. Included in their total wealth is Joes ZAR 500,000 defined contribution retirement plan that is administered by a local bank trust department. Joe makes the investment decisions for the retirement plan but Sarah makes the investment decisions for their other portfolio. Joe will not begin withdrawing funds from his retirement plan until he reaches age 70. The Finnegans have no children, but they have agreed to pay the nursing home expenses for Joes 86-year-old father, who is in very poor health. These expenses are projected to be ZAR 130,000 and are projected to last for at least three years. The Finnegans home in Johannesburg is valued at ZAR 750,000. The Finnegans do not have a mortgage on their home. They enjoy traveling around the world and project living expenses to total ZAR 115,000 per year. Their entire income is generated from their portfolio, which is taxed at 15%. The Finnegans would like to exclude inflation from any and all projections related to their account, so that they can evaluate their position based on current dollar amounts. Weight (%) Expected capital appreciation (%) Expected standard deviation (%) Cost basis (ZAR) Current price (ZAR) Current yield (%) Investments Cash Municipal bonds Domestic equity income domestic stocks Solar power Biotech Inc. The Drug Co. Chip Design Conglomerate Inc. International Stock Fund 1 1.0 5.0 0 1 5 50 12.40 12.40 0 4 18.00 22.00 4.0 12 13 10.00 35.00 0.0 35 40 7 30.00 13.00 0.0 30 36 7 75.00 80.00 2.0 20 28 7 58.00 20.00 1.0 22 22 7 28.00 70.00 4.0 10 13 7 10 14.00 30.00 3.0 8 18 The local bank trust department also custodies the Finnegans taxable ZAR 1.5 million inheritance account, but for this account, Sarah Finnegan directs all the trades. Sarah expresses her social priorities through her financial investments. She deliberately excludes tobacco, defense, oil and gas, and chemical companies from her universe of potential investments and she is obsessed with tax minimization. Sarahs portfolio allocation is shown in the above table. Sarah is also passionate about animals. Her activism has led the Finnegans to become involved in the Organization for Animal Conservation (OAC), and it is their intention to bequest the stock of Conglomerate Inc. to the organization. They also hope to use the growth in the portfolios assets to make additional contributions of similar size as often as possible. 3Required: a) From the information provided, indicate one item that would affect Sarahs ability to tolerate risk and one item that would affect her willingness to tolerate risk and explain each with one reason. b) Formulate the constraints portion of an investment policy for Sarah, addressing each of the following: (i) Liquidity requirements (ii) Taxes (iii) Time horizon (iv) Unique circumstances c) Describe the tax consequences if the Finnegans make an immediate charitable bequest their Conglomerate Inc. holdings to OAC. (i) Determine how the Finnegans will most likely be allowed to value the donation. (ii) Determine how the donation would most likely be treated on their personal tax return. d) Recommend the most appropriate asset allocation adjustments for Finnegans ZAR 1.5 million portfolio to meet their goal of funding charities and Joes fathers nursing home care. Sarah has indicated that she does not want to alter her current allocation to the international stock fund. Indicate how the allocation to each asset class listed below should be changed from the current allocation, and justify your response. Your answer should address the risk-adjusted returns of non-cash asset categories. (i) Cash (ii) Municipal bonds (iii) Domestic equity income fund (iv) Individual domestic stocks
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