Compadres,
I just did the 2009 exam and was extremely surprised that the return is grossed up (before tax) before inflation and not after. There is no indicator pointing to this in the question.
I got it wrong and wonder: How do you know? What are the indicators?
It is more logical and realistic to gross up after inflation, because inflationary income is taxed as well (living in Argentina - with 30% inflation and no adjustments of tax brackets - I can tell you, that s**t really hurts…)
If you’re talking about the actual 2009 CFA Institute morning exam, then, respectfully, you’re wrong when you say that there was no indicator in the question. To quote:
“. . . a tax rate of 20% [applies] to the . . . withdrawals from the investment account.”
Because you don’t withdraw the inflation portion of the return – you leave it in the account to continue to grow – it isn’t taxable; you should have grossed up the return for taxes, then added inflation.
I wrote an article answering your question for you: http://financialexamhelp123.com/inflation-in-required-rate-of-return-to-tax-or-not-to-tax/
Thanks. Much appreciated. This is extremely helpful.
When they consider your beatification and evaluate your miracles and charitable works, please call me as a witness.
You are making a huge difference for me with your continuing help! Thanks!
My pleasure.
I appreciate your kind words.