Proceeds from Sale of Company Not Included in Liquidity Requirement?

CFA Level III Portfolio Management
#1

Little confused by the answer to 1C of 2013 AM official mock. Subject family, the Voorts, “will be” adding net proceeds from the sale of their company to the investment portfolio.

1C asks to determine liquidity requirement for the Voorts in the coming year. Answer key nets out income but doesn’t net out the payment for the sale. Is this because sale payment isn’t considered “coming year”? Or is there something buried in the CFA text that divestitures shouldn’t be counted in the liqudiity requirement?

Thanks.

#2

Bump. I did the same thing. Case explicitly states the taxes from the sale of the business are due immediately. In calculating the liquidity requirement we just assume they already paid it?

Anyone know exactly why?

#3

I would think that since this is part of the transaction, the taxes are paid and then the net is the positive inflow to the portfolio. I can’t quote curriculum on this

#4

That makes sense, but in the case it doesn’t say the taxes are paid. It says they are due. Splitting hairs I guess.

#5

One of the most difficult things about the tests is knowing when and when not to make assumptions about things stated in case facts. I have finally learned to pay attention to every detail in a case, but that ends up raising a ton of questions on what they case writers are trying to convey. When I figure it out, I will let you know LOL

#6

This is a theoretical exam and it is assumed taxes are paid the second they are accrued. Unless a government official is present at the point of sale I can’t see why I should pay taxes immediately. Still, you (especially as a CFA candidate) must realize there is no legal way to avoid this tax and hence you are better off assuming net proceeds.

Besides, a prudent financial advisor will not invest your funds knowing you owe taxes. This liability is due yesterday, not next year!

Going back to OP, sales proceeds are always part of the investment base and not a liquidity reserve. How do you imagine adding 8.5m to a liquidity reserve to meet your annual expenses of 220K? That’s financial blasphemy and as a portfolio manager you are supposed to do the exact opposite; minimize liquidity and invest the rest.