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Study Session 4-5: Private Wealth Management

Computing twice for inflation?

Dont you feel like you are sometimes computing twice for inflation?

For example Salary 100,000
Expenses 120,000 (increase by 1% because of inflation, so you do 121,200)
Net cash needs = 21,200

Asset base = 300,000

Required nominal return for the next year  =  21,200/300,000 = 7.07% + 1%.

CFAI 2015 Q7B

When computing the present value, the before tax return of 8% is converted to an after-tax return - should we always use after tax return when running a time value of money question related to required returns/investable base?

Rate of Return pre-tax calculation with inflation

How to calculate pre-tax rate of return? In CFA AM mock, I did see some qns, the pre-tax return is calculated before adding the inflation, but in schweser they add in inflation then calculate the pre-tax.

example: Return required: 5%, tax rate 30%, inflation 3%

Wealth Tax

CFAI Mock Exam PM - Question 16:

If Buylak’s expectations about the Landlochen investment property are realized, using Exhibit 1, the after-tax net cash proceeds that Kasey will receive on disposal of the property at the expiration of the lease is closest to:

A €3,145,500. B €3,345,500. C €3,370,500.

I approached this question using only capital gains tax - why is both the captial gain & wealth tax applied in this question?


Liquidity Requirement for Individuals

Might be a dumb question, but I want to make sure I understand.

If you have more income than expense, you generally do not include the net amount in liquidity requirement unless stated otherwise (current annual savings used to offset funding one time payment to children’s future education needs)

If you have more expense than income, you include the net amount in liquidity needs.

Taxes Types and Investment horizon

What are the types of taxes that consume a greater share of investment growth as investment horizon increase? i.e don’t have a flate rate but increase in percentage as investment horizon increase.

Tax Drag

Regarding tax drags,

Is the tax drag unaffected by investment return and time horizon for deferred capital gain but is affected by both in the case of accrual taxes?

I also don’t get this statement:”Whereas the tax drag on after-tax accumulations subject to annual accrual taxes compounds over time, the tax drag from deferred capital gains is a fixed percentage regardless of the investment return or time horizon.”


It is probably a lame question, but my brain freezed.

FVIFcg = (1 + r)n(1 – tcg) + tcg 

Why do we add the Tcg in the above eqquation?

after tax return equals pretax return

How can this be, after tax return be equal to pretax return:

“When returns are subject to accrual taxes, the after-tax return is equal to the pretax return, r, multiplied by (1 − ti) where ti represents the tax rate applicable to investment income”

2016 essay exam -6C

In 2016 exam, Question 6C, I do not get why we had to get the monthly return and annualize it. why did not we get the annual return right away?

The answer is presented below.

Calculate the minimum annual after-tax return required for the Mattisons to be able to retire in 10 years, assuming Greer’s assumptions are correct.

Note: Assume all cash flows occur at month-end.