The Medical Research Foundation (MRF), 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 fixed-income assets. The finance committee understands that these actions are causing the real value of foundation assets and the real value of future grants to decline because of inflation effects. Until now, the finance committee believed it had no alternativeto these actions, given the large immediate cash needs of the research programs being funded and the small size of the existing foundations capital base (10). The foundations annual grants must at least equal 5 percent of its assets market value to maintain its tax-exempt status, a requirement that is expected to continue indefinitely. 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 finance committee wishes to develop new grant-making (spending) 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 the following components of a new investment policy statement for the foundation: 1. Return objectives. 2. Risk tolerance 3. Liquidity requirement 4. Time horizon 5. Tax consideration