Asked by Layton Bicanovsky on May 28, 2024
Verified
Medfield College's $10 million endowment fund is not allowed to spend any contributed capital or any capital gains. The fund may spend only investment earnings. The fund is expected to need between $500,000 and $1,000,000 to pay for new lab equipment for the science building. Which of the following is (are) true?
I. The fund should have a target rate of return of at least 10%.
II. The limitations on spending require that the fund limit its considerations to growth stocks.
III. The requirement to spend money out of the fund this year provides a liquidity constraint that may reduce the fund's rate of return.
A) I only
B) II only
C) I and III only
D) I, II, and III
Investment Earnings
Profits or gains derived from various investments, including interest, dividends, and capital gains.
Capital Gains
The profit that results from the sale of a capital asset, such as stock, bond, or real estate, where the sale price exceeds the purchase price.
Contributed Capital
Funds raised by a company through the issuance of shares, representing the capital that shareholders have invested in the company.
- Understand the implications of endowment fund spending rules on investment strategies.
- Identify appropriate asset allocations based on investor profiles and goals.
Verified Answer
PM
Peter MasihMay 30, 2024
Final Answer :
C
Explanation :
I is true because if the fund has a target rate of return of 10%, it should be able to generate enough investment earnings to cover the cost of new lab equipment. II is false because the fund's limitations on spending do not require that it limit its considerations to growth stocks. III is true because the requirement to spend money out of the fund this year provides a liquidity constraint that may reduce the fund's rate of return, as it may have to sell securities at an inopportune time to raise the necessary funds.
Learning Objectives
- Understand the implications of endowment fund spending rules on investment strategies.
- Identify appropriate asset allocations based on investor profiles and goals.