Folks, I am just trying to get some input on how you guys approached this question during your practice runs. Today, I attempted at it and the question looked deceptively easy. My approach was very textbook like (a.k.a Ingers and the Susan Fairfax approaches). My return calculation came at 7.25% or 7.63% using the multiplicative approach. Now the CFAI answer used the approach of PV and Terminal Value and came up with 7.34% to 7.46 %. I know my approach to calculation was very simple…find out the living expenses and divide by investable asset base (add 2.5% inflation to it). So…is this approach totally wrong…I am trying to guage what kind of a point loss I would have faced had this been the real exam. Any insights are appreciated. Shams.
When the case says the clients want a certain amount of money at a certain point in time, you will use the PV, N, I/T, CF, FV method. If you are given an asset base and expenses and are asked what is the required return for the upcoming year without being given a required amount of assets in the future, you take the expenses divided by asset base. The problem I had with this case is that it said the clients “desired” the money so I wasn’t sure if that meant it was a required return or a desired return. Turns out it was a required return.
hezagenius, Thanks for your reply…I figured that’s what it was - after the fact…it would be good to see if anybody tried the expenses/asset base method in the actual 2007 exam and how they performed in the 1st question - it’s definitely 30% of the total grades and the outcome would largely determine >70% score on this question… I will just need to practise these kind of questions