Question 3 (Foundation) The Medical Research Foundation (MRF), based in the United States was established to provide grants in perpetuity. MRF has just received word that the foundation will receive a $45 million cash gift three months from now. The gift will greatly increase the size of the foundations endowment from its current $10 million. The foundations grant-making (spending) policy has been to pay out virtually all of its annual net investment income. Because its investment approach has been conservative, the endowment portfolio now consists almost entirely of xed-income assets. The nance committee understands that these actions are causing the real value of foundation assets and the real value of future grants to decline because of ination effects. Until now, the nance committee believed it had no alternative to these actions, given the large immediate cash needs of the research programs being funded and the small size of the foundations capital base. The foundations annual grants must at least equal 5 percent of its assets market value to maintain MRFs U.S. taxexempt status, a requirement that is expected to continue indenitely. The foundation anticipates no additional gifts or fundraising activity for the foreseeable future. Given the change in circumstances that the cash gift will make, the nance committee wishes to develop new grant-making and investment policies. Annual spending must at least meet the 5 percent of market value requirement, but the committee is unsure how much higher spending can or should be. The committee wants to pay out as much as possible because of the critical nature of the research being funded; however, it understands that preserving the real value of the foundations assets is equally important in order to preserve its future grant-making capabilities. You have been asked to assist the committee in developing appropriate policies.

Formulate and justify an investment policy statement for the foundation.