Liquidity calculation for foundation

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From past paper:
-spending requirement 6%
-management fees 0.4%
-yearly contribution at beginning of each year = 2,000,000
-foundation portfolio value at end of yr 1 was 105,730,000.
In year 2, the answer for liquidity requirement is given as: 105,730,000 x (0.06 + 0.004) = 6,766,720 - 2,000,000 = 4,766,720.
Since the contribution is beginning of year i thought it would go to the portfolio value. So why is the liquidity calculation not: (105,730,000 + 2,000,000) x (0.06 + 0.004) = 6,894,720
 
hmm not sure what is the question here.
I seem to remember this one as i was wrong at first attempt. Here it is important to read the case carefully as it mentioned specially the reference point used to calculate the next year spending (which is the past yr end value) and then on top of that deduct the newly received contribution.
Your attempt to add the 2mm and they multiple the spending need is not in line with the case. Please read the case and look for the key sentence(s).
 
olivia_x wrote:
hmm not sure what is the question here.
I seem to remember this one as i was wrong at first attempt. Here it is important to read the case carefully as it mentioned specially the reference point used to calculate the next year spending (which is the past yr end value) and then on top of that deduct the newly received contribution.
Your attempt to add the 2mm and they multiple the spending need is not in line with the case. Please read the case and look for the key sentence(s).
Click to expand...
Why is the contribution not added to the intial portfolio value? Why is it only taken out at the end?
 
usually the spending requirement would be a % of the market value of the investment portfolio as of the end of the previous year. For simplicity’s sake you should assume 105.7m is on 31 Dec and then you know what you’ll have to spend the following year (6% plus fees). 2m contribution is then paid in on 1 Jan so your liquidity needs are the 6% plus fees minus 2m you get
 
citykris wrote:
usually the spending requirement would be a % of the market value of the investment portfolio as of the end of the previous year. For simplicity’s sake you should assume 105.7m is on 31 Dec and then you know what you’ll have to spend the following year (6% plus fees). 2m contribution is then paid in on 1 Jan so your liquidity needs are the 6% plus fees minus 2m you get
Click to expand...
So should we assume that liquidity = calculated distribution - any contributions/donations ??
Similar to a defined benefit plan where liquidity = distributions - contributions
 
Just think about it. Why would you sell an extra 2 million worth of securities only to have to repurchase them? You’ll just incur transaction costs. Take the 2 mil cash contribution and put it in the distribution and not move the portfolio around.
This was from the 2013 AM exam.
 
The portfolio value in year 2 grows by the excess of return and liquidity.
The 2,000,000 is used to offset the year’s liquidity, and any excess of the return over the the liquidity needs adds to the end value.
Note that the spending rules use the ending value, and the contrib is made at the begining. If the liquid needs for the year is less than the contribution, then you would put the excess liquidity as non-cash, and the needs as cash. Here, all of it was cash.
 
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