In calculating T* why cant we simply multiply Tcg by the portion of return that is unrealized.

Why do we take it before tax by dividing by (1 - Watr)? Thanks

In calculating T* why cant we simply multiply Tcg by the portion of return that is unrealized.

Why do we take it before tax by dividing by (1 - Watr)? Thanks

you have to take on the proportion of the untaxed thus far.

Proportion Left to be taxed = (1-(pi+pcg+pd))

You paid TCg already on piTi + PcgTcg + PdTd

so you have to now pay Tcg on (1-(piTi + PcgTcg + PdTd))

So Tcg* = Tcg * (1-(pi+pcg+pd)) / (1-(piTi + PcgTcg + PdTd))

Did we have to this because in computing r* we deducted the taxes paid on interest div cg ?

Im stuck on this formula since last week

no. because you paid some taxes last time round … (last year) based on the proportion of taxes paid.

now in future you have to account for the portion paid, vs. portion unpaid.

do not try to dissect this formula and waste your brain cells on it. remember this one formula…