Q1 - 2010 AM - living expenses and pre-tax incom

CFA Level III
#1

Lima’s current pretax annual compensation is $140,000 and her current annual living expenses are USD 96,000. Her future salary increases are expected to match any increases in living expenses on a pretax basis. Why divided the 96,000 living expenses by (1-T%) when calculated the net yearly CF balance? I mean what is the sense behind it. Their explanation wasnt clear enough. Thanks

#2

Living expenses are after-tax. All other information stated above are before-tax. So, you have to caculate the before-tax living expenses by dividing the after-tax living expenses by (1-t).

#3

I remember finding that odd as well. I think it was to help our understanding of the answer, but as far as I could find it didn’t have much to do with it. Pretty much, her after tax annual expenses are 96,000, so she needs 96,000/(1-T) pre tax income to support that lifestyle, which is 128,000— so she can save 12,000 per year, but this was given to you in the problem.

#4

Thanks

But they did not mention it is before tax! … how could we figure this out from “current annual living expenses” that this is after tax!

#5

You don’t really need to do it that way or at all in fact. They already give you the annual contribution to the TDA as 12k.

If you wanted to know if there was any remaining CF, then you just do:

[140 - 12 (tda contribution)] * 0.75 = 96 which is the same as her living expenses.

#6

and if you paid taxes you know - your income is pre-tax, expenses are after tax.

you cannot have expenses pre-tax … in the cfa land.

#7

Thanks pokhim

cpk123