You are a managing partner of a prestigious investmentcounseling firm that specializes in individual rather thaninstitutional accounts. The firm has developed a nationalreputation for its ability to blend modern portfolio theory andtraditional portfolio methods. You have written a number ofarticles on portfolio management and you are considered anauthority on the subject of establishing investment policies andprograms for individual clients tailored to their particularcircumstances and needs.
Dr. and Mrs. A.J. Mason have been referred to your firm and toyou in particular. At your first meeting on August 1, 2012, Dr.Mason explained that he is an electrical engineer and long-timeprofessor at a local university. He is also an inventor and, after30 years of teaching, the right to one of his patented inventionshas just been acquired by a new electronics company, ACS, Inc.
In anticipation of the potential value of his invention, Dr.Mason has followed his accountantâs advice and established aprivate corporation, wholly owned by the Masons to hold the titleto the patented invention. It was this privatecorporation that sold the right to Dr. Masonâs invention to ACS,Inc. ACS, Inc. has agreed to pay $1 million in cash, payable at theclosing on September 30, 2012, for the right to Dr. Masonâsinvention. In addition, ACS, Inc. has agreed to pay royalties toDr. Masonâs private corporation on its sales of systems thatutilize the invention.
While all parties are optimistic about prospects for success,they are also mindful of the risks associated with any new firm,especially those exposed to the technological obsolescence of theelectronics industry. The management of ACS, Inc. has indicated toDr. Mason that he might expect royalties of as much as $100,000 inthe first year of production and maximum royalties of as much as$500,000 annually thereafter.
During your counseling meeting Mrs. Mason expressed concern forthe proper investment of the $1 million initial payment. Shepointed out that Dr. Mason has invested all of their savings intohis inventions. Thus, they will have only their Social Securityretirement benefits and a small pension from the local universityto provide for their retirement. Dr. Mason will be 65 at September30, 2013. His salary from the local university is currently $55,000per year and he does not expect this amount to change between nowand his planned retirement on his 65th birthday. After retirementDr. Mason expects to continue earning $10,000 - $25,000 annuallyfrom consulting and speaking engagements. The expectedSocial Security benefits are expected to be $1,800 per monthbeginning in October, 2013 and the annual pension from the localuniversity is expected to be $15,000 per year beginning at the sametime.
Assuming the royalty payments from ACS, Inc. are equal to$100,000 in the first year and an average of $300,000 per yearthereafter, the Masons are planning to help with the education oftheir six grandchildren. The grandchildren range in age from 8 to12 years old. In addition, the Masons wish to establish ascholarship fund in the name of Dr. Mason at the local universitythat would provide $5,000 per year to one selected electricalengineering student. This scholarship should be self- sustainingwith its own investments.
Both Dr. and Mrs. Mason have strongly indicated during the firstappointment that they are conservative investors and want a minimumrisk of any losses.
Requirements
You and your fellow partners are to present a proposal thatspecifically meets the retirement investment objectives of theMasons listed below. Your proposal should be from 4 â 6 pagesdouble spaces, Times Roman 12 pt. In addition, your team shouldinclude a cover page listing each member of your team and aseparate list of any references used in preparing the proposal. Theproposal must follow APA rules in structure and presentation.
Dr. & Mrs. Masonâs Retirement InvestmentObjectives
*Provide $65,000 of withdrawals from the investment account eachyear. This amount will be in addition to the university pension andSocial Security received each year.
*Minimize income tax.
*Include at least three types of investments.
*Provide for active management of the portfolio with an annualfee of 1% - 1 ½% of value in the investment portfolio.
*Provide an annual growth after all withdrawals and fees of 4% -5%.
*Provide funding for the six grandchildrenâs education that willtotal $40,000 each when they reach the age of 18.
*Provide for a continuing scholarship at the local university inthe amount of $5,000 per year.
