Greetings all.
Can someone help explain the before tax nominal return calc in Study Session 8 - asset allocation Q6.
Mrs. Singh has an investable portfolio of 3,153,922.
She requires 130K after-tax.
Inflation rate = 1.5%, Tax rate = 30%.
The answer gives:
req. real return = 130K / 3,153,922 = 4.12%.
They then add inflation: 4.12% + 1.5%= 5.62%
Then account for taxes: 5.62% / 0.7 = 8.03%
So I’m confused because when you work backwards using real $ figures:
8.03% return on 3,153,922 = 253,259
After tax: 253,259 * 0.7 = 177,282
Accounting for inflation: 177,282 * (1-1.5%) = 176,396
What’s the deal? Thanks in advance.
cpk123
#2
The deal is that you’re treating the 1.5% as a return on $177,282.
If you treat it as a return on $3,153,922 – as you should – you get 1.5% × $3,153,922 = $47,309.
Thus, the net return is $177,282 − $47,309 = $129,973.
Voilà!
Fantastic link and thanks for correcting my calcs.
You guys are awesome.