Primary Capital

In the below question in CFA Mock 1 Q #7,

Is MTL not included in the primary capital because it is Corp loan or because MTL is usually not included?

Why is CTA not included as an equity?

Q. Using the planning framework that Richards suggests, which person’s estimate of the after-tax primary capital is most accurate?

  1. Boshe
  2. Richards
  3. Adams

C is correct. Primary capital is the sum of assets that fall into the personal and market risk buckets. It includes the residence, municipal bond portfolio, global equity fund, and cash equivalents. It excludes the values of MTL and the concentrated positions in CTAS public stock and the warehouse (investment real estate)—those are considered aspirational.

Asset** Value ($000s)****Cost ($000s)****Gain= Value − Cost ($000s)****Tax = Gain × 0.20 ($000s)****Net Value after Tax ($000s)Residence 2,000 2,000 0 0 2,000 Muni Bonds 3,000 3,150 (150) −30 3,030 Global Equities 3,400 1,650 1750 350 3,050 Cash Equivalents 300 300 0 0 300Total Net Value = **8,380

Adams has the correct value.

B is incorrect because Richards’ error was to include the net value of the CTAS, which is aspirational: 8,380 + 4,000 − [(4,000 − 1,000) × 0.20] = 11,780.

A is incorrect because Boshe’s error was to include the net value of the investment real estate (aspirational): 8,380 + 3,000 + tax loss of (cost of 4,300 − 3,000)× 0.20 = 8,380 + 3,000 + 260 = 11,640.

Concentrated Single-Asset Positions Learning Outcome

  1. Describe advisers’ use of goal-based planning in managing concentrated positions

any help on this?

Primary capital= core (primary residence, etc) + market investments (retirement, stocks, bonds)

Aspiration capital = concentrated positions, real estate, and other illiquid stuff

Hello. I have doubt differenciating. As far as i know, stocks are not primary capital, but for example a global invesment equity portolio it is. Can you please confirm that?
Is there any point where we can diferenciate?

Thanks in advance.

I think there is a difference between a liquid equity portfolio and a concentrated position so focus on quantum (80% of a company’s stock v a diverse portfolio).

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