The question mentions that CAS (City Arts School) has an endowment of $30mn and in its return objective intends to cover 1% inflation. The endowment has an annual operating budget of about 10mn of which 90% goes to salaries of staff. There is no mention about the schools revenue or cash flows and in solution for risk objective it says it has above average risk tolerance as endowment spending is not very large part of the schools annual budget. Is it 10mn/30mn - spending rate?
I am also facing the same issue as mentioned above. Not details are given so how does the solution says “endowment spending is not very large part of the school’s annual budget (less than 14 percent of revenues)”
Operating budget = 10 Mill, Beginning value = 30 Mill. Using spending rule –>30% * 4.5% * BV = 0.405
Revenue + funding from endowment = budget (assuming no cost overrun).
Funding from endowment –> since nothing is indicated, we can assume it to have been stable (i.e, adjusted by inflation) Say 4% inflation –> x = 0.405 + .7*x /1.04 –>
gives x= 1.24 1.24 / (10-1.24) = 14%.
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Endowment spending could fall by as much as 20% and impact would be less than 3% of revenues….
