i think i got 9.75% or something close to that…
The sign of the CF has to be the same as the sign of the FV and opposite to the PV. That’s about it.
Mo34: I may be wrong, but I thought: PV should be negative: you are funding the portfolio (an outflow) Pmt is negative: what flows out of the portfolio FV is positive: what you have left or “get back”
Whatever flows in is one sign, whatever flows out is another sign.
That inflation adjustment is what killed me. I read it and thought “is this saying only protect the 500k from inflation? that makes no sense, I must be reading it wrong” apparently I wasn’t -5 right there rohufish Wrote: ------------------------------------------------------- > on the first part, > > i took out the 255k and 55k as liquidity needs > from asset base. living expenses were anyway > covered month-month by salary (altho you can argue > they needed a 3 mos buffer or something - not > mentioned in the case, so i hail mary’ied and > ignored it) > > the inflation adj was reqd - but not because of > the fixed mortgage, but to preserve the asset base > in real terms. but the kink is - they only said > they wanted to preserve real value of 500k. the > 1st trust distn, they arguably could have eaten > into principal, so once again, arguably this could > be a very very long, complex calc if you really > want to get it exactly right. > > hail mary pass, one after another for 3 hrs. like > playing the last 2 minute warning, for the whole > game without timeouts or quarter > breaks…ridiculous.
jimmylegs Wrote: ------------------------------------------------------- > Mo34: > > I may be wrong, but I thought: > > PV should be negative: you are funding the > portfolio (an outflow) > Pmt is negative: what flows out of the portfolio > FV is positive: what you have left or “get back” think of it like making an IRR calculation. you put your original investment in one sign and all the cash flows you will be getting in another sign.
For the second return recalculation, it is 100% definitely 8.48% I checked in my calculator… it is easy since it is only 5 years to check… It was just 10,200,000 times (1+.0848)= new amount-55,000. Then repeat until you have done it five times and you get 15,000,000.
Shoot. lost some points here based on this nuance. This goes back to freshman year undergrad and I missed it. Hopefully they don’t take off full points because of this.
55k was the pymt needed after tax, did anyone adjust that for pretax to get the return req part? I think my answer was still around 9.45, but i had a pymt of 68750 or something…
They asked for After-tax returns. So no adjustments needed.
hala_madrid Wrote: ------------------------------------------------------- > yep, i went with average… there were some small > nasty details… although I guess not important > enough… i think i got this wrong Average risk-- No extra discretinary income and portfolio is paying the mortgage…at the same time a second 750 coming in 10 years helps out.
Did the question mention whether the Trust was Revocable or Irrevocable? If it was revocable, then the future payment cannot be relied upon.
^^ no it didnt but the next 750 would almost double their current wealth of 995 or something. i had above average
HOWEVER, people think think think>>>>>>>> do you remember mental accounting? we all did mental accounting. again watch as i never touch a question’s specifics: lets say i make 100K and my expenses are 100K. i have a mortgage that is 3K a month ` 36K annual. by mental accounting i start thing, oh i got my expenses covered. i only need to take care of mortgage from my portfolio. i am looking at mortgage different from my living expenses. hence mental accounting.
jimmylegs Wrote: ------------------------------------------------------- > Mo34: > > I may be wrong, but I thought: > > PV should be negative: you are funding the > portfolio (an outflow) > Pmt is negative: what flows out of the portfolio > FV is positive: what you have left or “get back” Nope…Payment has to be the same as the FV, whatever sign you want to use. The PV then has to be different than those two. Im 100% sure about this and even decided to do a proof by doing it both ways…and my way had the higher interest rate then if you had the PV and payments same sign which would make sense because you were pulling 55k a year, not adding.
jimmylegs Wrote: ------------------------------------------------------- > Mo34: > > I may be wrong, but I thought: > > PV should be negative: you are funding the > portfolio (an outflow) > Pmt is negative: what flows out of the portfolio > FV is positive: what you have left or “get back” Also thats not the right way to look at the funding. Funding is an INFLOW to the portfolio…and OUTFLOW to the investors bank account.
Yes I realize my error; was just in denial for awhile. Missed easy points.
still confused on the inflation, why the heck didnt you have to add it on the second part? they wanted to protect purchasing power the only reason to not include it was if the 15 mm was in future dollars, the case did not state this but of course cfai was probably assuming.
In the second part, they needed 15M at retirement and fix payment. so no need to add inflation…
I adjusted the second answer for inflation. I had 8.48% and then multiplied times 4% for inflation. They said to protect for inflation. I got like 1.0848*1.04=12.8%, something like that. I know thats a high return requirement. But without the inflation adjustment, the purchasing power is not maintained even if you want a target amount of $15M. At least thats what I think.