I guess most of you has already solved 2008 AM… Private Wealth: it is stated that those guys are taxable at 20% (15%) on their income. They have to pay mortgage out of portfolio return, which should be after-tax. Nothing is stated that they get a tax deduction for mortgage, so it seems that taxes should be taken into account. I have arrived to the correct inflation-adjusted required return, but also made an adjustment for taxes. Why guideline answers do not make it? Thanks in advance.
Everything you are given is after tax: their salary & expenses (which cancel out), their mortgage, the current value of their investment portfolio and even the trust distribution. Thus you can compare apples to apples, after-tax to after-tax. The other tax rates don’t factor in because they never mention they made X$ in capital gains or investment income. Plus as it relates to individual investors (which are almost always taxable) you want their returns stated in after-tax format. I wouldn’t adjust for pretax returns unless the questions specifically asks for the required pretax returns. In this case, the CFAI did some of the work for us on this one.