they never adjust for inflation when they use the TVM calculation. They either specifically mention “in today’s dollars” or they just omit to mention. In any case they never added inflation as you assume the 15 million he is targeting in 5 years are in today’s dollars
The second part to this question was similar to the first question in 2007. In Q1 2007 we were given a target FV of $3M. The claculations were: N=35 I/yr=??? solve for this and you got 4.84% PV=-4M PMT=205K FV=3M Then in the answer per the cfai description you took the return and multiplied it times inflation to protect the priniciple. Which was 1.0484*1.025=7.46%. How are these different two different? Both have present values, cash requirements each year, and a targeted FV.
5major Wrote: ------------------------------------------------------- > 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. Someone mentioned a footnote that said the future amount they needed was already inflation-adjusted. I don’t recall seeing it but I’m sure it was there.
n = 5 I think, not 35…
hezagenius Wrote: ------------------------------------------------------- > 5major Wrote: > -------------------------------------------------- > ----- > > 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. > > > Someone mentioned a footnote that said the future > amount they needed was already inflation-adjusted. > I don’t recall seeing it but I’m sure it was > there. There is no way there was a footnote stating this, can anyone confirm this? If so that unbelievable, mention it in the case they have all this other cr@p in there.
I also think in the first question that you had to factor taxes into the return calculation. I know that salary and expenses offeset eachother, and both grow by inflation together into the future which was fine. But, the after tax return for the first calc which was something like 55K/955K (cant remember eactly) needed to factor in both inflation and the 20% tax rate. The portfolio will needs to pay taxes on the $55k distribution every year. The portfolio wont generate tax free distributions. I think the first part needed to be adjusted for the 20% long term capital gains tax rate along with the inflation adjustment to protect the principle…This site is nerve racking!..
Ponponpq I was referencing an exam problem from last year. Not the test on Saturday. Dont want to confuse anyone.
5major Wrote: ------------------------------------------------------- > I also think in the first question that you had to > factor taxes into the return calculation. I know > that salary and expenses offeset eachother, and > both grow by inflation together into the future > which was fine. But, the after tax return for the > first calc which was something like 55K/955K (cant > remember eactly) needed to factor in both > inflation and the 20% tax rate. The portfolio will > needs to pay taxes on the $55k distribution every > year. The portfolio wont generate tax free > distributions. I think the first part needed to be > adjusted for the 20% long term capital gains tax > rate along with the inflation adjustment to > protect the principle…This site is nerve > racking!.. it was asking for after tax return, not before tax.
You are correct. I am mistaken. It was an after tax return calc in the first part. Looks like I screwed that one up. Hopefully I am not totally shot down for adjusting for taxes.
- in the first rtn calculation no adj for inflation was needed, as mortgage is fixed (i made this mistake as well adding the inflation premium) - no tax adjustments had to be made as portfolio return should be after tax in this case to achieve the mortgage pmts…
eastwest Wrote: ------------------------------------------------------- > - in the first rtn calculation no adj for > inflation was needed, as mortgage is fixed (i made > this mistake as well adding the inflation > premium) > - no tax adjustments had to be made as portfolio > return should be after tax in this case to achieve > the mortgage pmts… inflation was needed in the first question because they wanted the portfolio to grow at inflation.
Now that I realize I have made mistakes in both calculations. What were the minutes assigned to the return calculations? Was it like 12 minutes for the first one and like 6 for the second one?
s23dino Wrote: ------------------------------------------------------- > hezagenius Wrote: > -------------------------------------------------- > ----- > > 5major Wrote: > > > -------------------------------------------------- > > > ----- > > > 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. > > > > > > Someone mentioned a footnote that said the > future > > amount they needed was already > inflation-adjusted. > > I don’t recall seeing it but I’m sure it was > > there. > > There is no way there was a footnote stating this, > can anyone confirm this? If so that unbelievable, > mention it in the case they have all this other > cr@p in there. Does anyone know anything about this?
s23dino Wrote: ------------------------------------------------------- > There is no way there was a footnote stating this, > can anyone confirm this? If so that unbelievable, > mention it in the case they have all this other > cr@p in there. Somewhere early in the long AM thread, it is mentioned. Maybe they were talking about a footnote in the CFAI texts. Either way, I added inflation on the second return and I’m pretty sure it’s wrong.
again, pretty basic concept… if you go to a financial advisor and tell them your goals, and ask them what you need to have in 5 years to meet the goals, the financial advisor doesnt come back to you to say, oh you need $1 million plus inflation. you would fire them right there. their job is to give you one number which includes everything.
when someone says they want 1mm at retirement I dont think they calc in inflation, they want 1 mm in todays dollars. I dont think the FA said the 15 mm #. In any case I think I am wrong but I still think it is bs.
First question: add Inflation after calulating reqd return to get 55,000 BRL. 2nd part: no need to add since the terminal value was provided to you about 8.5% for the 2nd part. I cant recall what the first one was
First Return: 9.74% if you do geometric return or 9.52% if you do arithmetic (numbers were real return 5.52% and inflation 4%) Second Return: 8.48% (no inflation was necessary)
how many points was the second calculation worth. I think someone said around 6. Is this correct?
LargeMouthBass Wrote: ------------------------------------------------------- > how many points was the second calculation worth. > I think someone said around 6. Is this correct? 6 to formulate the return objective. That includes the calculation as well as stating the objective.