This is from 2004 past paper. 6Aii Question is for a company sponsored foundation. We are given the following and are asked to calculate the return requirement: - The spending requirement is $11m. - A side business of the foundation will generate $1.25m of pre-tax income this year. - Excluding the side business, the foundation portfolio has a market value of $200m. - A new clinic will require outlay of $4m in 6 months. - Corporate tax rate is 20%. Answer: Spending amount = 11m – (after-tax proceeds from sale of side business) = $11m – (1.25m x 0.8) = $11m – (1.0m) = $10m. Spending rate = $10m / ($200m - new clinic outlay) = $10m / ($200m - $4m) = 5.10%
Why don’t we add the 1.25m pre-tax (1.0m after-tax) to the portfolio value denominator? So spending rate should be: = ($11m / ($200m - $4m + 1.0m) =5.58%