 # Old Exam : 2006 AM Q1A

Serra has after-tax interest income of 100K on his cash savings at the end of the year (t=1) and the after-tax nominal annual return for growth equity is 8.5% (retrun of 40,000K x 0.085 = 3,400K). Then, at t=1 (when he retired), why only the investable assets at t=0 are used to calculate the required return while the cash outflows (2,080K, with inflation of 4% from t=0) of t=1 are incorporated in the calculation of required return ? Why above-mentioned 3,500K (100K+3,400K) is not incorporated in the calculation of required return ? Anyone can help ?

I think in this way (maybe wrong) They are not used, as they will be part of the required return for next year. i.e. required return include the return from equity & cash.

But it is quite impossible that the value of the investable assets at t=0 and at t=1 are same !

Very good question. I also thought that they should be used

The question only said they are return for current year. For next year, the return will be in the form as required return.

In its solution, t=0 (before retirement), I found : CIF (5,000K+100K+3,400K=8,500K)=COF(2,000K+1,200K+800K+4,500K=8,500K) What I learned is “Very much attention shall be paid to every statements in the vignette”