Investment Policy Statement and Analysis of Leasing ✓ Solved

The portfolio will include: 1. Domestic equity which consists of 60% of total portfolio allocated to different companies (large and small) within many sectors 2. Mutual funds with 35% of portfolio 3. Remaining funds of 5% should be invested in corporate bonds.

Investment Strategy: The investment strategy used in this portfolio is a tactical asset allocation. In this strategy, the investments will be regularly adjusted to the changing market conditions subject to forecasts or guesses of how the stocks are expected to perform in future. The aim of using this strategy is to optimize market exposure to the best by maximizing risk-adjusted returns.

Investment Rationale: The stock in the portfolio will hold the highest percentage of 60% because investment in stock has more advantages. Investing in stock opens up the chance for the investor to earn two types of returns: capital gains when stock prices rise and dividends paid every year. Additionally, diversifying stock investments minimizes risks as one industry may experience losses while another generates returns. The stocks are highly diversified across sectors including service industry (31%), healthcare (26.40%), conglomerates (3.60%), and utilities (31%). High-risk investments are pursued to maximize returns.

Murual funds represent 35% as they leverage market expertise, facilitating access to diverse stock portfolios for smaller investors. Meanwhile, corporate bonds, with a minimal risk, account for 5% of the investment, reflecting the investor's inclination towards medium to high-risk securities.

The performance of the portfolio is compared to the NYSE index, which had an average percentage return of 1.63% while the portfolio return was 1.38%. The lessons learned emphasize that high-risk stocks can yield higher returns and that active trading enhances profitability.

Lease vs. Purchase Analysis:

Comparing two lease types—operating and capital leases—reveals distinct advantages and disadvantages. An operating lease typically involves lower monthly payments and retains an asset's off-balance-sheet nature, preserving capital for other investments. However, it denies the lessee ownership benefits, and total costs may accumulate substantially over time.

Conversely, a capital lease offers long-term asset ownership, fostering equity. The lessee can benefit from depreciation and interest expense deductions, but initial costs are higher, and it obligates the lessee to the asset's maintenance. The capital lease is deemed less risky due to ownership and asset value appreciating over time.

In Lewis Securities Inc.'s scenario, leasing is advantageous due to lower initial expenditure and included maintenance, making it suitable in a rapidly evolving tech landscape.

Investment Policy Statement Objectives:

The objective is to build a retirement fund for a young professional willing to take high risks with equities. The targeted strategy entails a moderate to high-risk asset allocation across diverse sectors to optimize returns while managing risk. The benchmark involves substantial investments in moderate to high-risk areas, aiming to outperform main market indices such as the S&P 500 and NASDAQ.

Present Value Analysis:

Present Value of Owning the Equipment

The present value of the contract involves calculating cash flows over the four years with the consideration of the 10% interest rate on a $1,000,000 loan. The cash flows include loan payments, maintenance contracts, and the after-tax net cash flow from the expected residual value of the equipment.

Discount Rate Rationale

The discount rate reflects the company's cost of capital. In this context, a 10% rate is appropriate, being the interest rate for a term loan adequate for maintaining market stability.

Present Value of Leasing the Equipment

The present value of leasing entails evaluating the consistent annual lease payments of $260,000 over four years, including maintenance, using the effective tax shield available to Lewis.

Net Advantage to Leasing (NAL)

By comparing the net present values of both options, we will derive the NAL to ascertain whether leasing or purchasing is financially viable for Lewis, considering total cash flows, tax implications, and expected residual values.

Residual Value Risk Assessment

Incorporating residual value uncertainty proves pivotal. Should the residual value vary immensely, leases that shifted risk to the lessor become advantageous for management’s decisions on cash flows from the equipment.

Rationale for Lease Decision from Lessor's Perspective

As a lessor, I would assess credit risk, asset value depreciation rates, and the likelihood of lease termination. Further, analyzing the broader market demand for similar lease structures will inform leasing strategies.

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