Joffrey Lupul, a soon to be retired player with the Toronto Maple Leafs hockey team, is a long-standing client of yours. His net worth is well over of $10,000,000, and he is an avid player in the stock market and other high-risk investments. However, with his looming retirement, he has decided to move some of his wealth into low-moderate risk investments.

Joffrey feels he has done his homework and found a nice low-moderate investment: the RBC Monthly Income Fund. The fund has paid an annual interest distribution of $0.51 annually over the past year. Joffrey believes that the fund's price will not fluctuate more than plus or minus 20% over the next year (compared to its current price of $14.17 per share).

He is considering investing $300,000 of his own money into the fund. In addition, he is also considering borrowing additional funds from your firm to invest. He thinks that this fund is going to be a winner over the next 12 months. Your firm's call money rate is currently 6.50% annually. The maximum margin rate on this investment is 30%.

 

Given the scenario, and assuming a marginal tax rate of 30%, assess and analyze Lupul's investment idea. Justify your answer with both qualitative and quantitative reasoning and computation.

Should Joffrey make this investment?

Should he include leverage in his investment mix?

What will be the impact of tax on his returns?