Boston Society exam - Q1 net, required, question, society, weekend

Carson

Double post, but I think it would be good to discuss this:



Has anyone managed to answer your question Inbead?
I just did the Boston society exam this weekend, and am very confused by the way to calculate indiv IPS's required returns.

In the Boston exam's they use gross of tax values for the spending requirements so that they don't have to later account for the taxes in the ptf's return.

For example:

Spending requirement (net of taxes) = 280 000$
Pre-Tax requirement = Spending / (1-tax rate) = 280 000 / (0.70) = 400 000

Investable assets = 14 140 000 - (Home) = 14 140 000 - 2000000 = 12 140 000
Required ptf return = 400 000 / 12140 000 = 3,29%
Inflation = 4%
Return objective = 7,29%

Here's what I don't get, In the Schweser notes, they would've have calculated the required return the following way:

Spending req's (net of taxes) = 280 000$
Spending req's (net of taxes next year) = 280 000 * 1,04 = 291 200

Investable assets = 12140 000 - (this year's spending req) - (this year's tax liability) = 12 140 000 - 280 000 - 120 000 = 11 860 000

*Note In the exam, they didn't account for the tax liability that's due in 3 months.? How come?

Real return after tax = 291 200 / 11 740 000 = 0,248

Nominal return before tax = (1,0248)*(1,04)-1 / 0,70 = 0,0940

I would really appreciate your input on this...

Thanks guys!!!

thommo77

J. Wrote:
-------------------------------------------------------
> Double post, but I think it would be good to
> discuss this:
>
>
>
> Has anyone managed to answer your question
> Inbead?
> I just did the Boston society exam this weekend,
> and am very confused by the way to calculate indiv
> IPS's required returns.
>
> In the Boston exam's they use gross of tax values
> for the spending requirements so that they don't
> have to later account for the taxes in the ptf's
> return.
>
> For example:
>
> Spending requirement (net of taxes) = 280 000$
> Pre-Tax requirement = Spending / (1-tax rate) =
> 280 000 / (0.70) = 400 000
>
> Investable assets = 14 140 000 - (Home) = 14 140
> 000 - 2000000 = 12 140 000
> Required ptf return = 400 000 / 12140 000 = 3,29%
> Inflation = 4%
> Return objective = 7,29%
>
> Here's what I don't get, In the Schweser notes,
> they would've have calculated the required return
> the following way:
>
> Spending req's (net of taxes) = 280 000$
> Spending req's (net of taxes next year) = 280 000
> * 1,04 = 291 200
>
> Investable assets = 12140 000 - (this year's
> spending req) - (this year's tax liability) = 12
> 140 000 - 280 000 - 120 000 = 11 860 000
>
> *Note In the exam, they didn't account for the tax
> liability that's due in 3 months.? How come?
>
> Real return after tax = 291 200 / 11 740 000 =
> 0,248
>
> Nominal return before tax = (1,0248)*(1,04)-1 /
> 0,70 = 0,0940
>
> I would really appreciate your input on this...
>
> Thanks guys!!!


hey J.,

did the same as you and got the answer wrong I saw another post of yours where you re saying that the BSAS was too easy, what was your score?