QUESTION TWO James Harden Omondi, 34, is married to Serena Williams Omondi, 33, and they have twins, Harden.jr and Serena aged 9, respectively. The couple have a KES 30 million portfolio comprising a house of KES 15M, equities worth KES 12M and Treasury bonds of KES 3M. James and Serena are both computer programmers and run their own separate firms. Each earns about KES 3M per year, is taxed at a flat rate of 30% on income and 5% on dividends and capital gains. The annual expenses of the couple are KES 4.5M and they plan to send their two children to a prestigious college in 9 years' time. The college fees each year is going to be KES 2M in total for 4 years. The parents want to have accumulated the value of these fees by the time the children begin college. Once the children graduate from college in 13 years' time, the Omondis will deem them mature enough to take care of themselves. They will reduce their annual expenses from KES 6.5M per year to KES 3M in and sell their companies for KES 200M in total order to raise funds to purchase a more appropriate house in 10 years' time from the time of their children's graduation, costing KES 120M. Capital gains tax will be payable immediately on sale and the cost basis is zero. The balance from the proceeds of the sale of the business and purchase of the house will be invested in the portfolio. Immediately after purchasing the house, the Omondis will retire continuing with charity work. Their expenses are expected to increase to KES 12M per year due to donations to charities of KES 9M per year. They expect to live to for another 30 years after moving into the house. The historical nominal required rate of return on their portfolio has been 12% per annum and inflation has been historically at 3% and this rate is expected to continue indefinitely. You may assume that all the cash flows in the case are nominal cash flows REQUIRED i. What is the investable portfolio of the Omondis ? (2 marks) ii. What is their liquidity requirement? (2 marks) ii. Do they have above average, average or below average ability to take risk? (2 marks) iv. What is the present value of the college fees? (3 marks) What is the value of the portfolio just before the house purchase? (3 marks) vi. What return does the portfolio have to generate to meet the retirement goal? (3 marks) TOTAL 15 MARKS V. QUESTION TWO James Harden Omondi, 34, is married to Serena Williams Omondi, 33, and they have twins, Harden.jr and Serena aged 9, respectively. The couple have a KES 30 million portfolio comprising a house of KES 15M, equities worth KES 12M and Treasury bonds of KES 3M. James and Serena are both computer programmers and run their own separate firms. Each earns about KES 3M per year, is taxed at a flat rate of 30% on income and 5% on dividends and capital gains. The annual expenses of the couple are KES 4.5M and they plan to send their two children to a prestigious college in 9 years' time. The college fees each year is going to be KES 2M in total for 4 years. The parents want to have accumulated the value of these fees by the time the children begin college. Once the children graduate from college in 13 years' time, the Omondis will deem them mature enough to take care of themselves. They will reduce their annual expenses from KES 6.5M per year to KES 3M in and sell their companies for KES 200M in total order to raise funds to purchase a more appropriate house in 10 years' time from the time of their children's graduation, costing KES 120M. Capital gains tax will be payable immediately on sale and the cost basis is zero. The balance from the proceeds of the sale of the business and purchase of the house will be invested in the portfolio. Immediately after purchasing the house, the Omondis will retire continuing with charity work. Their expenses are expected to increase to KES 12M per year due to donations to charities of KES 9M per year. They expect to live to for another 30 years after moving into the house. The historical nominal required rate of return on their portfolio has been 12% per annum and inflation has been historically at 3% and this rate is expected to continue indefinitely. You may assume that all the cash flows in the case are nominal cash flows REQUIRED i. What is the investable portfolio of the Omondis ? (2 marks) ii. What is their liquidity requirement? (2 marks) ii. Do they have above average, average or below average ability to take risk? (2 marks) iv. What is the present value of the college fees? (3 marks) What is the value of the portfolio just before the house purchase? (3 marks) vi. What return does the portfolio have to generate to meet the retirement goal? (3 marks) TOTAL 15 MARKS V