Individual IPS questions - Pre and Post tax returns

I have looked at questions going back a while and it appears that there is no set way of knowing if you need to gross up income required/returns or not. 2009: Ingrams Pre tax Nominal returns required. Gross up net income by tax, add inflation 2008: Carvalhos 1st part Calculate after tax nominal rate of return (tax impact calc not performed add inflation) Two year column 2nd part straight NPV calculation, target return required, no inflation or tax impact 2007: Ingrams Calculate pre tax nominal returns Required terminal value of assets Time Value calculation performed, tax impact calculation not performed, inflation added. I won’t go before 2007, but you can check those years as well. The big question is when are you suppose to gross up for taxes? And are taxes supposed to be applied before or after adding inflation?

[(1 + r)*(1 + i)] / ( 1 - t)

Has anyone managed to answer your question Inbead? I just did the Boston society exam this weekend, and am very confused by the way to calculate indiv IPS’s required returns. In the Boston exam’s they use gross of tax values for the spending requirements so that they don’t have to later account for the taxes in the ptf’s return. For example: Spending requirement (net of taxes) = 280 000$ Pre-Tax requirement = Spending / (1-tax rate) = 280 000 / (0.70) = 400 000 Investable assets = 14 140 000 - (Home) = 14 140 000 - 2000000 = 12 140 000 Required ptf return = 400 000 / 12140 000 = 3,29% Inflation = 4% Return objective = 7,29% Here’s what I don’t get, In the Schweser notes, they would’ve have calculated the required return the following way: Spending req’s (net of taxes) = 280 000$ Spending req’s (net of taxes next year) = 280 000 * 1,04 = 291 200 Investable assets = 12140 000 - (this year’s spending req) - (this year’s tax liability) = 12 140 000 - 280 000 - 120 000 = 11 860 000 *Note In the exam, they didn’t account for the tax liability that’s due in 3 months.? How come? Real return after tax = 291 200 / 11 740 000 = 0,248 Nominal return before tax = (1,0248)*(1,04)-1 / 0,70 = 0,0940 I would really appreciate your input on this… Thanks guys!!!

From looking at various exams, it looks like you need to line up the cashflows both this year’s and next years on a post tax basis. Which means all the cashflows and their tax impact included. Now if they have asked for “After Tax” like 2008, calculate the return based on investment and required income and do not account for tax. However, if they ask for “pre tax” like in 2009, you need to gross up the income requirement and then add inflation. The exception to all of the above is if they ask for Time Value of Money calculation where you are clearly given a “Terminal Value” and asked to calculate a rate of return. Obviously, this WILL be on the exam so it is a good idea to sort it all out now rather than on exam day. I will reference the other thread going on regarding this issue here: http://www.analystforum.com/phorums/read.php?13,1131550,1137449#msg-1137449

hey J., The BSAS mock exam is planned in Paris in May, 22nd. How did you find it this year? Thanks! M.

Any feedback regarding this year’s BSAS exam? Thanks! M.

I found the BSAS pretty easy. I’d even say too easy. There’s no way in hell the exam is going to be similar to the format of the BSAS. I’m looking forward to hear you comments on it past May 22nd. J.