Sally Smith is a CFA charterholder who has been assigned by her boss to meet with Tom Thompson and his wife Aedona. Tom, age 50, is the president and founder of Fast Boats Inc. he founded the company in the one-car garage behind his first house 30 years ago where he hand-built motorboats. Since that modest beginning he has built into a worldwide integrated manufacturer and seller of the world's finest high performance boats in the 40 and 80 foot size range. Fast Boats now employs 500 employees worldwide with sales of about $500 million.

 Prior to constructing an IPS for Tom, Sally has interviewed him twice and hand a long phone conversation with Tom's tax attorney. Sally is now reviewing all of her notes prior to constructing a statement of objectives and constraints. 

Some notes regarding Tom Thompson:

 Tom started the company at age 23 right out of engineering college doing all the work himself for the first 2 years. As Tom said, "I was so good and so successfully there was never any reason for additional schooling." Despite this, he is an avid reader and it is evident he has the business skills and education to rival the best corporate executives and a thorough knowledge of boat manufacturing.

 Tom has signed a binding letter of intent to sell the business the next year. Tom's net proceeds after taxes from his share of the company will be $60 million. In addition, he will receive a salary of $1 for the next 3 years. At the end of these 3 years his relationship with the company will completely end and he will receive an additional bonus payout not to exceeding $30 million (taxable as ordinary income) subject to the company meeting certain goals. But the actual payout is uncertain - it could range anywhere from zero to the full amount of $30 million. Additionally, he and his wife will receive generous and comprehensive medical insurance for their lifetimes.

 Tom's actual role at the company for the next 3 years will be minimal, if nothing. He will be selling his current home within the next year and should realize approximately $2 million after taxes. During the next year he will need about $10 million for construction of his dream home outside Orlando, Florida. Tom and his wife also have savings of $1 million held in a money market fund.

 Tom's wife is also 50 years old and both are in excellent health. They need a total income (after tax) of $2 million per year (growing with expected inflation of 2% per year). They have no children but would like to gift each of their nieces $1 million for the next year's Christmas gift. They have five nieces. All remaining assets at their deaths will be given to Tom's college. If possible, he would also like to begin a very large charity program in the next couple of years.

 All of their income is subject to a 30% tax rate except net capital gains subject to 15%. Tom is prepared to let a professional portfolio manager assume responsibility for his assets but does want to see at least 50% of the equities in international securities and within the international securities at least 20% in emerging markets. After much research by himself Tom is convinced these markets will offer better returns despite their high yearly volatility. He is committed to pursue higher returns with full understanding of the risk that accompanies such an approach. He has thought quite extensively about the amount of downside he can tolerate and has come to the conclusion that he would like to limit any annual portfolio declines to no more than 17%.

 He also has accumulated a $10 million 401(k) retirement account that he will aggressively manage himself. He specifically directs Sally to exclude this from all of her planning. In addition, he would like to exclude the $1 million savings held in a money market fund as an additional liquidity buffer.

 The final required rate of return for Tom's portfolio is close to_____________.

Answer rating: 100% (QA)

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