Grr IPS retrun Calc Before Tax wrong, return, needed, first

karoliukas

I have been operating on the formula for IPS retrun Calc of
Lets say real return needed is 5% there is a tax rate of .20 and inflation is three percent
I have been
.05/(1-.2) + .03 = .0925
I just saw in my notes (which i think is wrong)
(.05+.03)/.80 =.10….
Which is the right way? The first?

lucasg85

I had this problem a few days ago. if you multiply you are taxing inflation which does not make sense. i think it would be post tax return / (1-t) + inflation

random_walker47

^ I agree with the reasoning of smithyse but in most of the answer keys i have seen uses R/(1-t) + inflation
So I think instead of adding, multiplying the inflation would be the safest way to go.
For example, [(1+R)*(1+I)/(1-T)] -1 would be give the same answer as [(1+R)/(1-T)*(1+I)] -1

tango_gs

real after tax return as starting point. add inflation to get the nominal after tax return. divide that by 1-t to get the before tax nominal before tax return. this to me makes the most sense as you would be taxed on the nominal return (which is what is implied if you work the above backwards starting with before tax nominal return.

fishmarket

Just did a Schweser question that asked for the nominal before-tax return. Ex: [(1.05)(1.03)] / .7

Andreas42

inflation is addressed with after-tax dollars

cjs238

Add Inflation last , that’s what I thought

liquidity

Found it…Question 1 2009…
Its the first one…
.05/(1-.2) + .03 = .0925