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Wealth transfer taxes in cash from her fathers estate

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wealth-transfer taxes) in cash from her father’s estate. In addition, the Maclins haveaccumulated the following assets (current market value):£5,000 in cash
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Chapter 11 / Exercise 11-26
Personal Financial Planning
Billingsley/Gitman
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BFF5270 Funds Management TutorialWeek 3– Asset Allocation£160,000 in stocks and bonds£220,000 in Barnett common stockThe value of their holdings in Barnett stock has appreciated substantially as a result ofthe company’s growth in sales and profits during the past 10 years. Christopher Maclinis confident that the company and its stock will continue to perform well. The Maclinsneed £30,000 for a down payment on the purchase of a house and plan to make a£20,000 non-tax-deductible donation to a local charity in memory of Louise Maclin’sfather. The Maclins’ annual living expenses are £74,000. After-tax salary increases willoffset any future increases in their living expenses.During discussions with their financial adviser, Grant Webb, the Maclins expressconcern about achieving their educational goals for their children and their ownretirement.Webb has prepared the following investment policy statement for the Maclins.The Maclins’ overallrisk objectivemust consider both willingness and ability totake risk:Willingness.The Maclins have a below-average willingness to take risk,based on their unhappiness with the portfolio volatility they haveexperienced in recent years and their desire not to experience a lossin portfolio value in excess of 12 percent in any one year.Ability.The Maclins have an average ability to take risk. Although theirfairlylarge asset base and long time horizon in isolation wouldsuggest an above- average ability to take risk, their living expenses of£74,000 are significantly higher than Christopher’s after-tax salary of£80,000 (1 − 0.40) = £48,000 causing them to be very dependent onprojectedportfolio returns to cover the difference and therebyreducing their ability to take risk.Overall.The Maclins’ overall risk tolerance is below average, as theirbelow- average willingness to take risk dominates their averageability to take risk in determining their overall risk tolerance.The Maclins’return objectiveis to grow the portfolio to meet their educational andretirement needs as well as to provide for ongoing net expenses. The Maclins willrequire annual after-tax cash flows of £26,000 (calculated below) to cover ongoing netexpenses and will need £2 million in 18 years to fund their children’s education and
BFF5270 Funds Management TutorialWeek 3– Asset Allocationtheir retirement. To meet this objective, the Maclins’ pretax required return is 7.38percent which is determined below.The after-tax return required to accumulate £2 million in 18 years beginning with aninvestable asset base of £1,235,000 (calculated below) and with annual outflows of£26,000 is 4.427 percent, which when adjusted for the 40 percent tax rate, results in a7.38 percent pretax return (4.427%/(1 − 0.40) = 7.38%).Christopher’s annual salary £80,000 Less:taxes (40%)−32,000Living expenses−74,000Net annual cash flow−£26,000Inheritance900,000Barnett Co. common stock 220,000Stocks and bonds160,000Cash5,000Subtotal£1,285,000Less one-time needs:Down payment on house−30,000 Charitable donation−20,000Investable asset base£1,235,000Note: No inflation adjustment is required in the return calculation becauseincreases in living expenses will be offset by increases in Christopher’s salary.The Maclins’ investment policy statement includes the following constraints:i.Time horizon.The Maclins have a two-stagetimehorizon,becauseoftheirchanging cash flow and resource needs. The first stage is the next 18 years. Thesecond stage begins with their retirement and the university education years

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Term
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Christopher Maclin
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Personal Financial Planning
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Chapter 11 / Exercise 11-26
Personal Financial Planning
Billingsley/Gitman
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