EOC Problem #2, the Ingers: Christa’s liquidity requirement is 132,500 (prudent reserve), coming from the sale of IngerMarine shares. Answer key calculates her real return requirement as - 50,000 / (1,020,000+75,000+25,000) = 4.5% … where the 1,020,000 is the after-tax proceeds from the IngerMarine sale. Why isn’t the 132,500 prudent reserve deducted from the denominator? It’s not investible, in my mind. p.s. I figured someone already asked this, however couldn’t find a posting here…
Right. No mentioning of reserve NOR TAX. 7.4% is quite high LT return if it is already deducted from (high level of European) gains tax. In Germany, it is 50% according to table at p121. Assume that the calculation is to show that even if most optimistic scenario, she is not making it.
Agreed, thanks elcfa.