# calculation of after tax nominal required return

1. after tax nominal required return = after tax real required return + inflation rate

2. after tax nominal required return = before tax nominal required return * (1-tax rate), where before tax nominal required return = before tax real required return + inflation rate

Which one is correct?

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The first one is correct.

The second one might be correct, depending on what the vignette tells you.

Simplify the complicated side; don't complify the simplicated side.

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But this https://www.analystforum.com/forums/cfa-forums/cfa-level-iii-forum/91371100 states that the second is correct.

Totally confused:

1. after tax nominal = (before tax real + inflation)(1-tax rate) = before tax real (1-tax rate) + inflation (1-tax rate) = after tax real + inflation (1-tax rate)

or

2. after tax nominal = before tax real (1-tax rate) + inflation = after tax real + inflation

lizihengtotti wrote:
But this https://www.analystforum.com/forums/cfa-forums/cfa-level-iii-forum/91371100 states that the second is correct.

No, it doesn’t.

It depends on what the vignette says.  In particular, it depends on whether the return to cover inflation is taxable or not.  Sometimes it is, and sometimes it isn’t.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/