# IPS Question - inflation

Just curious to see what your thoughts are on inflation for calculating required return. I’ve seen examples where they just add inflation to the pretax required return and other examples where you have to add the inflation rate to the after tax required return and then take the pre-tax return on it. I guess my question is best illustrated by examples 2 examples I can list are as follows: 1) 2007 CFA sample exam morning question #1 - guideline answer: Real required return: 4.84% + 2.50% (inflation) = 7.34% 2) Book 6 reading 46:Pg 106: required return [2.6% + 2% (inflation)] / (1-t) = 6.57% Anyways any comments appreciated

It might pertain to whether or not the required return is calculated before or after tax. If all info is given after tax in the problem and they ask for after tax return then you would just multiply by the inflation rate. If all info is given before tax and you have to calculate after tax return, then you calculate the required return as done in your second example. disclaimer: this is just my thoughts so I could be wrong