John's Inheritance:

A few days ago, Markus, a certified financial analyst with a well-known brokerage, received a call from Ipoh's finance director. She informed him that the city had received a generous, but challenging, the gift in the form of a heritage from the estate of a wealthy local entrepreneur, James John. John had left the city 2,000 shares of CIMB stock, currently valued at approximately RM1,250,000.

John had bought the shares in 2004 at RM100 per share. When the share's value rose significantly, John decided that rather than selling it and paying capital gains taxes, he would donate the shares to the Ipoh city. The terms of the Inheritance required the city to set up a trust fund, which they would name the John Memorial Trust. The trust was to distribute 5% of the trust's value in the form of grants each year to community groups involved with youth activities.

The will explicitly indicated that the trust should sell the CIMB shares as soon as possible and use the proceeds to create diversified share portfolio. Over the long term, John expected the portfolio's value to increase by 8% to 12% a year, thus allowing the grants to grow at the rate of inflation or better.

Assume you are in Markus's position, preparing to answer the Ipoh city committee's queries. The committee members are knowledgeable, smart people with no special training in investments. Markus notices that for some of the queries, he will certainly have to "do the computation." He originally intended to use his laptop, a projector, and a computer program that emulates a financial calculator, but when he learned that the committee included a high school math teacher and a civil engineer, he decided to use basic formulas in his presentation as well. Following are some of the queries that committee members asked at the meeting.

Question1

Justify your answer why do you think that John specified that the trust should invest the money in stocks rather than bonds or certificates of deposit?

Question 2

Criticise your answer on how will the trust obtain the cash to make the grants if the dividends do not amount to 5% of the portfolio's value?

Question 3

Evaluate your answer on what are we actually paying when we buy a share of stock?