IPS - Inflation return, please, always, scenario

DoubleDip

so in what scenario do we have to add inflation to the return in the first step of calculation

for ex - 100 * 1.03/5million.

I know we always have to add in the last step.

please help

Darien

CFAdreams Wrote:
-------------------------------------------------------
> The tax thing still slips me up a bit. She will
> need 90,000. So her portfolio needs to provide
> her with that, which we assume should be after
> taxes. In the return requirement in the anser,
> they are giving you pre-tax return. If they were
> solving for an after tax return, i believe it
> would be higher (closer to 10%). But again, this
> part is hazy to me and i dont really understand
> why.


You have it a bit backwards. The answer gives you the after tax return. She needs to wind up with 90,000 AFTER taxes have been deducted. 90,000/1,950,000 = 4.6% = after tax required return before inflation. The PRE-tax return would be (4.6/.75) = 6.13%, ignoring inflation. Or (90,000/.75=120,000)/1,950,000=6.13%.

The reason the 4.6% number isn't divided by .75 in the answer to get the pre-tax return is that they ask you to "formulate DuBois's return objective and calculate the required return over the coming year."

What did they NOT say? "Pre-tax." Is it silly that they didn't say it? Yes. The actual exam will be more clear. The way Schweser wrote these is such that if they don't say "Give us the pre-tax return" explicitly, you calculate the after-tax return.

As I said, I wouldn't expect the actual exam to be so...dumb.



Edited 3 time(s). Last edit at Saturday, May 29, 2010 at 12:33PM by Cubemonkey.

PalacioHill

no worries man. Thanks for your help

mcmc

has anyone of you guys taken the BSAS 2010? If yes; could you please explain why inflation was not accounted for in what you are referring to the 1st step?

thanks
M.

Windjammer

Sorry, my Schweser's book's at the office... just using my notes at this point.

Chuckrox

Thanks cfadreams. Nice catch.

so bottom line is always take inflation in first step if the above case is not given and again add it to the final answer.

How about Taxes then? Is her income from portfolio tax free? If not, why they haven't taken to calculate it?

I mean 90/0.75 to make 120K before taxes

infinitybenzo

Neveruse is talking about the last step in his post. if you are maintaining portfolios real value, you always add inflatin as the last step. I think you got this tho you said in your original post. We are surely confusing you now.

bboo

so, to answer pupdawg, you have to add inflation if they are maintaining the portfolio's real value - always the case

canadiananalyst

It looks like they tell you that she will need 60,000 in her first year of retirement (which is one year from now). They also tell you she will need 30,000 next year(one year from now). They are giving you amounts they will need in next years monetary terms (inflation already included), you do not need to inflate them. This would be doing it twice.

lcai

page 198 of schweser has not calculated in that way even though it is asking for coming year.

Can you please check?