Question

The James Children’s Hospital (JCH), based in Washington DC, has been operating has an operating budget of $15 million and has been operating at a budget surplus for the past two years. JCH has a $20 million endowment (JCHA) whose sole purpose is to provide capital equipment for the hospital. The endowment’s long-term expected total return is 8.6%, which includes a 3.3% income component. JCHE has no minimum payout requirement and expects no future contributions. Traditionally, the JCHE board of directors has determined the annual payout based on current needs. Payouts have been rising steadily – to $1.375 million two years ago and to $1.4 million last year.

Michelle Parker, CFO of JCHE, has asked the board’s guidance in determining a new long-term spending policy for JCHE. Remove the word knew. She has received $1.6 million in requests to buy equipment and is concerned about the inflation rate for medical equipment prices, which is 4%, versus 2.5% for the U.S. Consumer Price Index.

1 - Discuss the implications of the current pressure on JCHE to increase spending.

2 - Discuss how JCHE’s time horizon affects its risk tolerance.

3 - Determine a long-term spelling policy for JCHE, including a spending rate as a percentage of assets, and justify the policy.

Answer 1

1) The spending request at James Children’s Hospital is roughly 1.6 million. This is a high level of spending sue total the amount of assets that the hospital currently has. There is an 8.6 return rate per year the hospital predicts they will receive. This endowment is unlikely y maintain he vale with the percentage rate it is currently incurring. If such spending is permitted, the current beneficiaries of the JCHE may receive benefits at the expense of future beneficiaries, because the endowment is unlikely to be able to maintain its value in inflation adjusted terms.

2) This hospital has a perpetual time horizon, which means it has a higher risk tolerance level. However, this hospital has a short time horizon person which means the hospital has to look for investment that promises high yields. The higher risk tolerance results from the longer period available to make up for any market downturns. with high risk tolerance, JCHE CAN TARGETA HIGHER EXPECTED RETURN.

3) The hospital should look for a long-term spending policy that meets its high asset needs now and into the future. The hospital should look at its future expenses and see what policy will help them in the long run. The hospital should also look at its inflation rate and try to get a policy that Hasan even level of inflation throughout the years.