I have been operating on the formula for IPS retrun Calc of Lets say real return needed is 5% there is a tax rate of .20 and inflation is three percent I have been .05/(1-.2) + .03 = .0925 I just saw in my notes (which i think is wrong) (.05+.03)/.80 =.10… Which is the right way? The first?
Found it…Question 1 2009… Its the first one… .05/(1-.2) + .03 = .0925
Add Inflation last , that’s what I thought
inflation is addressed with after-tax dollars
Just did a Schweser question that asked for the nominal before-tax return. Ex: [(1.05)(1.03)] / .7
real after tax return as starting point. add inflation to get the nominal after tax return. divide that by 1-t to get the before tax nominal before tax return. this to me makes the most sense as you would be taxed on the nominal return (which is what is implied if you work the above backwards starting with before tax nominal return.
^ I agree with the reasoning of smithyse but in most of the answer keys i have seen uses R/(1-t) + inflation So I think instead of adding, multiplying the inflation would be the safest way to go. For example, [(1+R)*(1+I)/(1-T)] -1 would be give the same answer as [(1+R)/(1-T)*(1+I)] -1
I had this problem a few days ago. if you multiply you are taxing inflation which does not make sense. i think it would be post tax return / (1-t) + inflation