Louise
and Christopher Maclin live in London, United Kingdom, and
currently rent an apartment in the metropolitan area. Christopher
Maclin, aged 40, is a supervisor at Barnett Co. and earns an annual
salary of £80,000 before taxes. Louise Maclin, aged 38, stays home
to care for their newborn twins. She recently inherited £900,000
(after wealth transfer taxes) in cash from her father’s estate. In
addition, the Maclins have accumulated the following assets
(current market value): • £5,000 cash • £160,000 in stocks and
bonds • £220,000 in Barnett common stock The value of their
holdings in Barnett stock has appreciated substantially as a result
of the company’s growth in sales and profits during the past 10
years. Christopher Maclin is confident that the company and its
stock will continue to perform well. The Maclins need £30,000 for a
down payment on the purchase of a house and plan to make a £20,000
non-tax-deductible donation to a local charity in memory of Louise
Maclin’s father. The Maclin’s annual living expenses are £74,000.
After-tax salary increases will offset any future increases in
their living expenses. During discussions with their financial
adviser, Grant Webb, the Maclins express concern about achieving
their educational goals for their children and their own retirement
goals. Maclins tell Web: • They want to have sufficient funds to
retire in 18 years when their children begin their four years of
university education • They have been unhappy with the portfolio
volatility they have experienced in recent years. They state that
they do not want to experience a loss in portfolio value greater
than 12 percent in any one year. • They do not want to invest in
alcohol and tobacco stocks • They will not have any additional
children After the discussions, Webb calculates that in 18 years
the Marlins will need £2 million to meet their educational and
retirement goals. Webb suggests that their portfolio be structured
to limit shortfall risk (defined as expected total return minus two
standard deviations) to no lower than a negative 12 percent return
in any one year. Maclin’s salary and all capital gains are taxed at
40 percent and no taxsheltering strategies are available. Webb’s
next step is to formulate an investment policy statement for
Maclins.
Formulate the Tax constraint portion of an investment policy
statement for the Maclins (5 points)