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

manchester88

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?

cv4cfa

Found it...Question 1 2009...


Its the first one...

.05/(1-.2) + .03 = .0925

noel

Add Inflation last , that's what I thought

laurab

inflation is addressed with after-tax dollars

genuinecfa

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

neil1234

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.

torontoanalyst

^ 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