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had exhibited continuing patterns of dividend payment over the past
five years. The stocks offered only moderate growth potential—
probably no more than 2% to 3% appreciation per year. The mutual
funds in the portfolio were income funds invested in diversified
portfolios of income-oriented stocks and bonds. They provided stable
streams of dividend income but offered little opportunity for capital
appreciation. Now that Susan owns the portfolio, she wishes to
determine whether it is suitable for her situation. She realizes that the
high level of income provided by the portfolio will be taxed at a rate
(federal plus state) of about 40%. Because she does not currently need
it, Susan plans to invest the after-tax income primarily in common
stocks offering high capital gain potential. During the coming years
she clearly needs to avoid generating taxable income. (Susan is
already paying out a sizable portion of her income in taxes.) She feels
fortunate to have received the portfolio and wants to make certain it
provides her with the maximum benefits, given her financial situation.
The $10,000 cash left to her will be especially useful in paying
brokers’ commissions associated with making portfolio adjustments.
Questions a.
Briefly assess Susan’s financial situation and develop
a portfolio objective for her that is consistent with her needs. b.
Evaluate the portfolio left to Susan by her father. Assess its
apparent objective and evaluate how well it may be doing in fulfilling
this objective. Use the total cost values to describe the asset allocation
scheme reflected in the portfolio. Comment on the risk, return, and
tax implications of this portfolio. c.
If Susan decided to invest in a
security portfolio consistent with her needs—indicated in response to
question a—describe the nature and mix, if any, of securities you
would recommend she purchase. Discuss the risk, return, and tax
implications of such a portfolio. d.
From the response to question
b, compare the nature of the security portfolio inherited by Susan with
what you believe would be an appropriate security portfolio for her,
based on the response to question c. e. What recommendations would