Abigail Joseph is a 36-year old divorcee residing in U.S.

Abigail Joseph is a 36-year old divorcee residing in U.S. She has two children: age 10 and age 6. Joseph works as the head of treasury at Econet Wireless Corporation. The following information describes the financial environment in U.S.

Taxes

• Flat income tax rate of 25%.

• Wages, realized capital gains, and interest are taxed as income.

• Dividends are not taxed.

• Realized losses may be offset against income and may be carried forward to offset income in future years

Exchange and interest rates

• South African Rands rate: R15.24/ USD$

• US risk-free interest rate 1.5%

Health insurance

• Government provides health insurance to all citizens.

Retirement accounts (RAs)

• Contributions are pretax and the annual maximum for this benefit is $ 40,000 per year.

• Income taxes are only paid on withdrawals.

• No income tax is payable on the return of the RA.

• No penalties on withdrawals for education or housing.

Joseph’s current pretax annual compensation is $140,000 and her current annual living expenses are $96,000. Her future salary increases are expected to match any increases in living expenses on a pretax basis. Joseph is in good health, owns her home, and has no debt. Joseph is a disciplined investor, but a recent equity market decline caused her great anxiety. She is worried about her ability to fund her children’s education and her retirement. Joseph meets with her financial advisor, David Hanyire, to review her financial plan. Hanyire notes the following factors:

• Joseph desires to make annual pretax contributions $ 7,800 to a charity. This contribution is included in her annual living expenses.

• She plans to prepay her children’s future education costs at the end of this year.

• Joseph participates in Econet Wireless’s executive retirement program. At the mandatory retirement age of 65, she will receive a pretax payment of $ 2,000,000 only.

Hanyire determines that the prepaid education costs for both children will require a total of $ 50,000, including all taxes. He recommends:

• that Joseph prepay her children’s future education costs within the next 6-months

• that Joseph upon retirement purchase a life annuity to fund her retirement,

• that Joseph will need $ 3,000,000 (pretax) to purchase the annuity at age 65. Joseph agrees with Hanyire’s recommendation.

Additional information

South Africa risk-free interest rate is 4.5%

Questions

Formulate each of the following constraints of Joseph’s investment policy statement (IPS):

i. liquidity (2) ii. time horizon

One year later, after prepaying her children’s education costs and after making her annual RA contribution, Joseph has an equivalent of R 4,000,000 invested in her RA, the mount that was donated by her aunt in South Africa. Joseph’s other financial information remains the same.

a) State the return objective portion of Joseph’s IPS. Show all the relevant information that results to your conclusion.

b) Calculate Joseph’s required average annual pretax nominal rate of return until her retirement. Show your calculations.

Hanyire also advises Dellia Jasi, Joseph’s sister, a 37-year-old single woman with 4 children aged 10, 13, 15 and 18 years. Jasi works as a bankruptcy lawyer and is president of her own firm. Jasi’s annual income is $450,000 and her annual living expenses are $480,000. She is in good health, owns her home, and has no debt. Jason’s investment portfolio is currently valued at $1,500,000. Jasi is confident that long-term equity market returns will more than offset losses in market downturns. She continues to invest regularly. Jasi plans to retire early, sell her business, and donate the proceeds to charity. Her investment portfolio will fund her retirement expenses.

c) Identify two factors that decrease Joseph’s ability to take risks.

d) Identify two factors that decrease Jasi’s ability to take risks.

e) Determine whether Joseph or Jasi has a greater willingness to take risks. Justify your response with one reason.