MM AM Exam # 02 Question 1 C

CFA Level III
#1

Can someone explain me the solution here?

Client had a folio worth $4.2mn. Wants to make a donation at the end of this year of $500k. Salary of $300k before tax (30% tax). Expenses of $120k growing by 3% pa. Will retire at the end of the year and yearly savings are deposited in the account at the end of the year. Her portfolio makes 8% return this year.

Find out RRR for next year

My calcs were

$4.2mn*1.08 (return this year) = $4,536,000

Donation of $500k = $4,036,000

Savings this year 300k (0.7) - 120k = 90k

Folio Value at the end of the year = 4,036,000 + 90,000 = 4,126,000

Expenses next year = 120k * (1.03) = 123,600

RRR therefore is 123,600/4,126,000 = 3% (real) + 3% inflation = 6%

Answer is 7.1% which i dont understand.

Please Magician, help me :frowning:

#2

The calc is after tax. To make it before tax, i gross it up by 15%

#3

The 8% portfolio return is taxable. Your amount of investable assets is incorrect.

#4

where is the mistake in my calculation for investable assets? Please identify

#5

I told you: the 8% portfolio return is taxable.

You multiplied EUR 4.2 million by 1.08. You need to reduce the 8% by the tax rate.