Foundation Minimum Return - Add or Compound Tax?

CFA Level III Portfolio Management
#1

To calculate minimum return for a foundation.

Tax on market value = 0.1%

Operating expense = 2.0%

Long term inflation = 1.4%

Annual distribution target = 3.0%

My answer was => (1+0.1%)(1+2.0%)(1+1.4%)(1+3.0%) - 1 = 6.637%

Schweser’s was => (1+2.0%)(1+1.4%)(1+3.0%) - 1 = 6.53% + 0.1% tax = 6.63%.

I know CFAI has some leeway on adding or compounding inflation, but is tax treated the same way?

#2

Both is fine.

If you look at the guideline answers from previous exams, they accept either addition or compounding.

Typically its recommended individuals use addition and institutions use compounding.