# CFA 2003 Return calc

I know we’ve gone through this “when do we pre-tax just the spending requirement and then add inflation etc and when do we pre-tax the whole thing after adding inflation etc”. Thing is from all the discussions the end conclusion from what i read was that for a TDA it makes sense (kind of) to pre-tax the liquidity as this will be a distribution and only distributions are taxed for TDA. But on the 2003 CFA exam Q9 the liquidity requirement is pre-taxed before accounting for the expected growth in spending requirement and inflation…not a TDA. Anyone care to explain please?? Does make quite a diference in the return calc and would afect later questions as goes on to ask best portfolio Q given obj and constraints

Hey, I checked. The 2003 CFAI Q9 IPS answer on the Required Return Calc appear to be WRONG. Should be: 1) Calc Post Tax Real Return 2) Calc Post Tax Nominal Return = (1 + Post Tax Real Return) (1+ Inflation) -1 3) Calc Pre Tax Nominal Return = Post Tax Nominal Return / (1 - Tax Rate)

It would always take — [(1 + R)*(1 + Infl) - 1]/[1 - T]

Be careful! Not always! Depends on whether tax is on both income and gains, or only on income.

income and capital both taxed in this specific Q so can’t think of any reason for it to be any other calc than the usual

bidder - can you elaborate a bit more on your caveat?

I think you guys are way overthinking this thing. I went through that exam and got the same 6.71%. They’re expenses are \$78k after taxes, which means that the portfolio needs to make \$114k (which will be taxed at 30% and leave you the \$78k after taxes needed) and I divided the \$114k/\$3000k which is the asset base. This gave me 3.71% to which I added the 3% required for inflation and growth. I have done almost every exam from 2000 to 2009 and I have never seen it done differently in terms of inflation.

Exactly - So you 1st sort our all the taxes and get the after-tax-real-return and then just add inflation to make it after-tax-nominal-return. I am more curious about when we do the vice versa?

but the added return needed to compensate for inflation and growth in spending requirements (if applicable) will be taxed as well so the whole thing needs to be grossed up for pretax - that was the logic behind the normal formula of [(1+return)(1+inflation)-1]/(1-tax) having now done more CFA past papers and going back to check themyou’re right, i can’t find any individual’s IPS examples where they’ve done it any differently to what you’ve said… loads of threads on it though and the logic makes sense - i.e. all portfolio return will be taxed not just that portion that represents liquidity needs (unless TDA)