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.