The boss has sent Sally Smith, a CFA charterholder, to meet with Tom Thompson and his wife, Aedona. Tom, age 50, is the president and founder of Fast Boats Inc. He began the firm 30 years ago in a one-car garage behind his first home, where he manufactured motorboats by hand. Since those humble beginnings, he has grown into a global integrated producer and supplier of the world's best 40- and 80-foot high-performance boats. Fast Boats now employs 500 people globally and generates revenues of around $500 million.

Before developing an IPS for Tom, Sally conducted two interviews with him and a lengthy phone talk with his tax attorney. Sally is now examining all of her notes before to drafting a goal and constraint statement.

A few remarks on Tom Thompson:

Tom founded the firm at age 23 immediately after graduating from engineering school, doing all the work alone for the first two years. According to Tom, "I was so skilled and accomplished that there was never a need for extra education." Despite this, he is a voracious reader and it is apparent that he has the business skills and education to compete with the top corporate leaders, as well as a comprehensive understanding of boat building.

Tom has signed a legally binding letter of intent to sell his company the following year. After taxes, Tom's net revenues from his part in the firm will amount to $60 million. Additionally, he will earn a $1 paycheck for the following three years. At the conclusion of these three years, his link with the firm will be severed, and he will earn a bonus payment of up to $30 million (taxable as ordinary income) if the company achieves specific objectives. The exact payoff, however, is undetermined; it might vary anywhere from $0 to $30 million. Additionally, he and his wife will get lifelong medical coverage that is both substantial and thorough.

During the following three years, Tom's real involvement at the corporation will be minor, if not nonexistent. Within the following year, he will sell his existing residence for around $2 million after taxes. In the next year, he will require around $10 million to build his dream house outside Orlando, Florida. Additionally, Tom and his wife have $1 million in a money market fund.

Both Tom and his wife are 50 years old and in fantastic health. They need a total annual income (after taxes) of $2 million (growing with expected inflation of 2 percent per year). They do not have children but would want to give each of their nieces $1 million for Christmas the following year. The couple has five nieces. All leftover assets will be transferred to Tom's college upon their deaths. In the next couple of years, he would also want to launch a very substantial charity initiative, if feasible.

Except for net capital gains, which are subject to a 15 percent tax rate, their whole income is subject to a 30 percent tax rate. Tom is willing to delegate responsibility for his assets to a professional portfolio manager, but he requires at least 50 percent of the equities to be invested in international securities and at least 20 percent of the foreign securities to be invested in developing markets. Tom is sure, based on his own extensive analysis, that these markets will give superior returns despite their substantial annual volatility. He is devoted to pursuing better returns with a full grasp of the associated risk. He has given much attention to the amount of downside he can endure and has determined that he wants to restrict yearly portfolio drops to no more than 17 percent.

He has also amassed a $10 million 401(k) retirement plan, which he will manage aggressively. He instructs Sally to expressly eliminate this from her plans. Additionally, he wishes to omit the $1 million invested in a money market fund as an extra liquidity cushion.

Answer the following using the above case:

1. Toms willingness to take risk is________________, because__________________

1. Average; he is a successful entrepreneur and he manages their own 401k in a conservative way
2. Below average; he can only take a shortfall risk of 17%
3. Average; he is willing to hold large portion of international/emerging market securities
4. Above average; his personality profile is characterized as individualist and he is a successful entrepreneur

2. Toms ability to take risk is________________, because__________________

1. Average; he has significant asset size and relatively low spending need
2. Below average; he is at the age 50, short life expectancy, and relatively short time horizon
3. Above average; shortfall risk of 17% warrants a high ability to take high risk and he is at age 50, good health, long life expectancy, and relatively long time horizon
4. Average; $10 million 401k provides a cushion

3. Tom and his wifes ongoing living needs and investible portfolio size are____________ and __________, respectively.

1. $5 million; $52 million
2. $7 million; $47 million
3. $2 million; $60 million
4. $2 million; $47 million

4. The final required rate of return for Toms portfolio is close to_____________.

1. 4.255%
2. 6.255%
3. 8.94%
4. 11.05%