First- We obtained the required return from (expected cash flow requirement/ net investable assets)= 1.17% Then we added inflation of 3% and our “After tax Nominal” return is 4.17%. This would mean our After tax real return is 1.17% 1) I understand why its after tax ( because the cash flows, spending etc that we used in the outflows-inflows of the expected cash flow requirement was already after taxes) Q? Hypotheticaly speaking, if our tax rate was 30%, would our Nominal return objective be 4.17/1-.30 ?? Or would this be gross?? I get confused, with real, nominal, gross return requirements. And another curve ball pg 167 “Strictly speaking, the inflation rate should be adjusted upward by the portfolio avg tax rate, but for ease of presentation , we have simply added the 3% inflation” Im confused
that’s right to do it properly you would do (1.17 + 3 ) / ( 1 - .30) that would be after tax real return + inflation = after tax nominal return after tax nominal return / (1 - tax) = before tax nominal return In, Ingers case, they said for ease of presentation they just added inflation without adjusting it for taxes, but then also added a disclaimer that you quoted, to tell us how to do it right.
Volkovv, you should be working for Schweser, your amazing. Thanks again