Mr and Mrs Gidimadjor lives with a house help at Dodowa Estate. Their three children and grandsons are financialy secure and independent. They are over 60 years of age and in good health. Because they took an old age medical insurance policy during their working years, their medical costs are covered by insurance. Their house is in need of major renovation and the work will be completed within the next eight months at an estimated cost of GH200,000. Their after-tax cost of living is expected to be GH230,000 for this year and are rising with inflation expected to be 11.8% annualy. In addition to their annual pension after tax payment of GH75,000, they receive about GH120,000 from their investment income. Their primary objective is to maintain their financial security and support their current lifestyle. A second objective is to leave GH1,000,000 to their grandchildren and GH1,000,000 to their local church. They recently completed the GH1,000,000 gift to the church by creating a Gift to church Fund. Preserving the remaining assets for their granddaughter is important to them. Their investment income, including bond interest and stock dividends, is taxed at 22%. Their investment returns from capital gains are taxed at 12.5%, at the time of sale. There are no other tax considerations. They benefit from two investment accounts 1. The Gift to church Fund (GH1,000,000) represents their gift to the church. During their lifetimes, they receive fixed annual payments of GH40,000 (tax free) from the Gift to church Fund. Except for the annual payments to the Church, the Gift to church Fund is managed solely for the benefit of the church and they may not make any other withdrawals of either income or principal. Upon their death, all assets remaining in the Gift to church Fund will be transfered into the church.

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Case Study Mr and Mrs Gidimadjor lives with a house help at Dodowa Estate. Their three children and grandsons are financialy secure and independent. They are over 60 years of age and in good health. Because they took an old age medical insurance policy during their working years, their medical costs are covered by insurance. Their house is in need of major renovation and the work will be completed within the next eight months at an estimated cost of GH200,000. Their after-tax cost of living is expected to be GH230,000 for this year and are rising with inflation expected to be 11.8% annualy. In addition to their annual pension after tax payment of GH75,000, they receive about GH120,000 from their investment income. Their primary objective is to maintain their financial security and support their current lifestyle. A second objective is to leave GH1,000,000 to their grandchildren and GH1,000,000 to their local church. They recently completed the GH1,000,000 gift to the church by creating a Gift to church Fund. Preserving the remaining assets for their granddaughter is important to them. Their investment income, including bond interest and stock dividends, is taxed at 22%. Their investment returns from capital gains are taxed at 12.5%, at the time of sale. There are no other tax considerations. They benefit from two investment accounts 1. The Gift to church Fund (GH1,000,000) represents their gift to the church. During their lifetimes, they receive fixed annual payments of GH40,000 (tax free) from the Gift to church Fund. Except for the annual payments to the Church, the Gift to church Fund is managed solely for the benefit of the church and they may not make any other withdrawals of either income or principal. Upon their death, all assets remaining in the Gift to church Fund will be transfered into the church. 2. The Family Portfolio (GH1,200,000) represents the reainder of our lifetime savings. The portfolio is invested entirely in very safe securities. Previously, the Gidimadjors had been working with another financial advisor, KK FINANCIAL CONSULT (KFC). The previous Investment Portfolio KFC constructed were based on the following assumption: Primary focus to be the production of current income, with long-term capital appreciation as a secondary consideration. The need for a dependable income stream precludes investment vehicles with even a modest likelihood of losses. Liquidity needs reinforce the need to emphasize minimum-risk investment. Extensive use of short-term investment-grade investments is entirely justified by the expectation that a low-inflation environment will exist indefinitely into the future. For these reasons, investments will emphasize Treasury bills, intermediate-term investment-grade corporate debt, and select blue chip stocks, whose dividend distributions are assured and whose price fluctuations are minimal. They need someone like (KFC) to develop a comprehensive plan for them to follow. They can follow such a plan once it is prepared for them. They will not sell a security for less than what they paid for. Given their need for income, they only invest in dividend paying shares. Required: 1. Prepare and justify an alternative investment portfolio for the Gidimajors. Do not provide a specific asset allocation in your response to this question. (15 marks) 2. Describe how your investment portfolio addresses three specific deficiences in the KK Consult Portfolio. (15 marks) 3. The Gidimadjors now raise a new concern: How can we judge whether our investment is appropriate for us and whether it will continue to be appropriate in the future? Several questions about the appropriateness of an investment policy include i. Is the policy written cleary and explicity? ii. Can the client sustain his/her commitment to the policy? iii. Can the manager maintain fidelity to the policy? You are to respond to the Gidimadjors question as follows: a. Describe how each of the the three policy questions is or is not relevant to the Smiths. (5 marks) b. Describe why the KFC investment policy is or is not appropriate in light of each of the three policy questions.