Scheweser just screw up with my head again.
Book 2 exam 2 morning session question 6 A. The ask to calculate the required nominal pre-tax return. the taxe rate is 25%.
the real after-tax return is 3.53%. the inflation is 3.5%.
in my head you need to do this this way :
you calculate the Nominal after-tax return : 1.0353 * 1.035 = 1.0715. then you take out the tax to find the pre-tax nominal return so :
7.15% / 0.75 = 9.53%
that take into consideration tha ALL the return is taxed, in my head their is no such thing as no tax on inflation return.
the answer given is this :
real after-tax return : 3.53% you put it in nominal 3.53%/0.75 = 4.71%
then you had inflation for nominal pre-tax return : 1.0471*1.035 = 1.0837…
how the hell ithe 3.5% is not affected by taxes. When you need to calculate the required after -tax return in a IPS you always do
1+real after-tax return * 1+inflation = Nominal after-tax required return.
if you take that back to pre-tax nominal return you divide real after-tax return /1-tax.