It feels like i am missing something here… The answer seems to be taking into account both the inflation (+2%) and above inflation growth for subscription expense growth (+1%) as part of required return for the WHOLE invested asset amount for Sopho.
The question clearly states that the objective is to maintain purchasing power of the investable assets, which in my view should just be to offset the 2% inflation, not (2%+1%).
I would have thought the required return, if one was to be specific would be the return needed to cover subscription payments growing at 3% BUT only need the invested assets (pots subscription payment) to be growing at 2%. If we were to simplify this question, I would say the assets need to return close to ~2% (as opposed to 3%) on top of the other required return components which i do not dispute -given the subscription payment is only a small % of total investment returns…
Hope that makes sense…love to know what i’m misisng…
You should never consider the “general” inflation rate for the operating expenses of the institution. Only the “specific” inflation rate for these expenses should be considered.
Here, the general inflation rate is 2%
Since expenses are 1% above general inflation rate, the specific inflation rate should be 1+2 = 3%, to be added to the required return.
Why do they tell us the subscription fee is at the end of the year? I would think you would have to discount that back to the beginning of the year with some rate?
But Since the subscription expense is end of year and the remaining info at the begining of year, why did not we discounted the value of the subscription expense?
The data table said “annual exp due at year end”. In most cases it will be the year end / annual obligations (unadjusted) over the investable base unless a specific period and/or adjustment is given.
No, the “one time” explicitly states (due immediately) a reduction to the asset base, and the other is due at year end (annual obligation). It’s telling us what the year end obligation is. No adjustment necessary.