Return Objective - Schweser Practice Exams Book 2 AM Exam 1 Q1A before, return, people, medical, posting

Viceroy

Portfolio Value = $5m
Pretax income = $150,000
Living Expenses = $100,000
Non tax deductible medical expenses = $100,000
Stipend to son = $50,000
Inflation = 2%
Tax rate = 33%

Calculate the after tax nominal return

I get 6.46%, schweser say 5.1%

Would like to see how other people get there answer before posting up schwesers answer.

Valores

Before tax income: 150 -->> after tax: 100,5 = 150 * 0,67

Expenses: 100 (living) + 100 (medical expense) + 50 (stipend to son) = 250

Diff. between Income and expenses to be covered by income from PF= 149,5

Return: 149.5/5000 = 0,0299 = 2,99%

(1+Return) * (1+Inflation) = 5,05 --> 5,1%

How did you get to 6.46?


Paul

PS: Edited because I clicked to fast on "Save changes"



Edited 3 time(s). Last edit at Friday, May 27, 2011 at 07:42AM by Pauluss.

Windjammer

Living expenses + Non tax deductible medical expenses + Stipend to son = $250,000
After-tax Income = $150,000 * (1-33%) = $100,500
Net Expense = 149,000
After-tax real return required= 149,000/5m = 2.99
After-tax nominal return required = (1.0299)(1.02) - 1 = 5.1%

lcai

ok, maybe I'm missing something here but wouldn't the return on the portfolio be subject to tax as well. My calculation for the expenses to be covered are the same as yours so i get:

After-tax income = $100,500 = ($150,000 * (1-0.33))
Living expenses = $100,000
medical expenses = $100,000
stipend = $50,000

required return = 149,500

but then I went further by dividing it by (1- 0.33) to get $223,134 so that my ....... oh b*ll*cks I see where my mistake is here. i was calculating the pre tax nominal rate of return.

Thanks guys

skycfa

dderato Wrote:
-------------------------------------------------------
> Only difference I had was bumping the medical up
> by 5% since they gave us this years exp of $100m
> and next year would be 5% more. Comes out to
> about the same answer of 5.1%, but they may hit us
> on it if the calc is not perfect???

Depends on the question...if it says "Show you calculation" you won't get full credit even if your answer is correct. If they state: "What is the required return?" your answer can be minimized.

jmh530

Kwonyboy, I see, I will review my notes tonight. Thanks for the clarification.

bpdulog

does the solution actually make sense to anybody? So you calculate next year's costs including that year's medical expenses then use the regular inflation going forward. That's just not right mathematically. Wouldn't medical expenses keep rising at a higher rate?