I am totally confused with Schweser. Given r: before-tax real return i: inflation t: tax rate c: management cost What’s after-tax nominal return? Based on Schweser Book2 P145, it should be (1+r)(1+i)(1+c)/(1-t). But could someone explain to me the answer of Schweser Practice Exam V1, Exam 2, Question 6? I believe Schweser took a different way, as (1+ r/(1-t))(1+i)(1+c) These two approaches would give totally different numbers. Do we have any CFAI old exam sample to calculate after-tax nominal return? Thanks.
Sorry, the question should be What’s BEFORE-tax nominal return?
Actually i had exactly the same question. CFAI uses (1+r)(1+i)(1+c)/(1-t). in problem 13 Reading 15 Book 2 (1+ r/(1-t))(1+i)(1+c) sounds more valid to me as Taxes dont apply to capital gains unless you sell the assets. I still want to know why CFAI used (1+r)(1+i)/(1-t) approach in problem 13. Is it because Cap gains and income is taxed at the same level fo 40% and final protfolio value should be 2m after taxes? I am confused
Problem 13 Reading 15 Book 2 calculates the before-tax REAL return w/o inflation adjustment, which is r/(1-t). I cannot find any old exam or sample question from CFAI calculating before-tax nominal return.
Well, the before-tax nominal return based on Schweser Book2 Page 145 is [(1+r)(1+i)(1+c)-1]/(1-t). Well, the before-tax nominal return based on Schweser Practice Exam V1 Exam 2, Q6 is (1+r/(1-t))(1+i)(1+c)-1.
elcaro, yes, my bad you are right, it is still not clear why they first calculate IRR and then divide it by 1-r, instead of first calculating payment pre tax and then using it to solve for IRR?
This question bothers me so much. Could someone give me some help? Thanks.