The Financial Advisor's Investment Case Investing an Inheritance The Kelleher brothers, Victor and Darin, could not be more different. Victor is assertive and enjoys tak- purchase or sale is a reasonable amount to use for ing risks, while Darin is reserved and is exceedingly illustrative purposes, Currently, commercial banks are risk averse. Both have jobs that pay well and pro- vide fringe benefits, including medical insurance and pension plans. You are the executor for their grand- father's estate and know that cach brother will soon inherit $85,000 from the estate, Neither has an im- mediate need for the cash, which could be invested to meet some long-term financial goal Once the funds have been received, you expect Victor to acquire some exceedingly risky investment (if he does not immediately squander the money). You would be surprised, however, if Darin chose to do anything other than place the funds in a low- yielding savings account. Neither alternative makes 3. What would be the percentage returns if the sale financial sense to you, so before the distribution of the funds you decide to offer financial suggestions 4. Must the two brothers leave the stock registered that would reduce Victor's risk exposure and in- crease Darin's potential return Given the brothers' ages and financial condition, you believe that equity investments are appropriate. 5. What would be the iimpact on the brothers' re- Such investments may satisfy Victor's propensity to take risks and increase Darin's potential return without excessively increasing his risk exposure (willingness to among brokers, you decide that $70 for a 100-share paying only 3 percent on savings accounts. To give the presentation focus, you decide to an- swer the following questions: What is the percentage return earned by Darin if he acquires 100 shares, holds the stock for a year, and sells the stock for $80? 2. What is the percentage return earned by Victor if he acquires 100 shares on margin, holds the stock for a year, and sells the stock for $80? What advantage does buying stock on margin 1 offer Victor? prices had been $50 or $100? in street name? If not, what would be the advan- tage of leaving the stock with the broker? Does leaving the stock increase their risk exposure? turns if the rate of interest charged by the broker increases to 10 percent? 6. If the maintenance margin requirement 30 percent and the price of the stock declined to $50, what impact would that have on each brother's position? At what price of the stock would they receive a margin call? 7. Why would buying the stock be more advanta- geous to both brothers than the alternatives you anticipate them to select? assume risk). Currently, the stock of Choice Juicy Fruit is selling for $60 and pays an annual dividend of $1.50 a share. The company's line of low-to-no-sugar juice offers considerable potential. The margin requirement set by the Federal Reserve is 60 percent, and broker- age firms are purchase stock on margin. While commissions vary were charging 7 percent on funds used to
