2005 exam, question 7

for those who have the exam…Elizabeth Yeo…in her first year of retirement, why isn’t the income from her money market fund included in the cash inflows? so confused…

btw, type “2005 morning session cfa” and you should bea ble to find a linkt hat lets you download it

you maybe right. I do not see the 100,000 donation reduced by 30,000 MM income.

the 30000 Income is included at the very top … in the inflows… look at it

and the taxes on that + the 450 K lumpsum taxable retirement component is removed from there as 134,400 (@28% tax).

So that seems to be fine.

One thing I do not see, and maybe someone can help me here.

Current Year Living Expenses (Now) = 250 K given.

This grows at 3% per year.

But they have used 257.5 K = (250 * 1.03) in Year + 2. Shouldn’t that have been removed in (Now +1) year?

Now + 1 Year expenses would then be: 257,500 + 100,000 (Donation) + 150,000 (Education 1st Year) = 507,500.

At the End of Year (Now+1) ->

Investable assets = 1,221,600 (Year Now Investment portfolio) +9,324,000 - 507,500 = 10,038,100

(1221600 = 1,200,000+30,000(Income)-8,400(Tax))

9,324,000=450,000+500,000+8,500,000-126,000 (Tax)

Now + 2 (1st year after retirement expenses)

100,000 (Donation) + 265,225 (Living expenses) + 159,000 (Education Year 2) = 524,225

And I end up with a higher return requirement…

the missing factor is that 257,500 has been considered in Year + 2

thanks…but what i don’t get is that the income from the money market fund isn’t considered a cash inflow in year 2? it says that the account earns 2.5% annually so wouldn’t the income continue into year 2? why does it suddenly stop?

regarding the expenses, i think because the expenses are assumed to occur at the end of the current year (i.e., one year from now), which then groes 3% thereafter.

same with question #1 in the 2006…the income from the equity portfolio suddenly stops in the first year of retiremenet. i guess we assume cash inflows from assets stop when one retires?

Just a thought

  1. There are not considering money market income after retirement because at retirement the whole investable assets will be allocated to new assets classes in consistent with risk/return objectives & CMEs. So it need not be necessarily be in money market funds.

  2. They are not deducting expenses in the one year from now coz they are getting met by salary. But its unusual…

Yeo is retiring one year from now. At retirement he would receive his salary + all other benefits as mentioned in question (Gratuity+EPF) fro the company?? His after tax salary will meet his living expenses for this year. Next year onwards those expenses will have to be met from portfolio…