Required Return - For the Millionth time!!!

I’ve seen/read so many posts on this and need final clarification. How are you guys calculating required return with say the following data: Annual Expenses \$50,000 Inflation = 3% Tax Rate = 30% Assets = \$600,000 The way I was doing it (which seems to be wrong), is (\$50,000/\$600,000)/(1-t) + Inflation I notice on P.255 of Schweser Q # 7B, they calculate it differently… Seen to many variations on calculating required return.

do they do it like [(1+(\$50,000/\$600,000)/(1-t)]*(1 + Inflation)?? [(1+(\$50,000/\$600,000)]*(1 + Inflation)?? (NOT INCLUDING TAX IMPACT? I get confused on when to use the 1/(1-t) factor…

Not my strong area…YET, but I think I’d do it like this: [(50000 / 600000) + Inflation] / (1+t) or alternatively: [(1 + (50000 / 600000) * (1 + Inflation)) - 1]/ (1+t)

this is where it gets grey - do uplift for taxes AFTER INFLATION or BEFORE?

Data_Monkey Wrote: ------------------------------------------------------- > this is where it gets grey - do uplift for taxes > AFTER INFLATION or BEFORE? check james post, he claims before…

That’s from asset allocation in Schweser only. If you were to cross reference it was the CFAI material, you will notice it glaringly missing (no calculation method). The past CFAI exams calculated it the previous way Data Monkey has. The L3 instructor blogs on the first method as well as being the correct one.

jamespucyk Wrote: ------------------------------------------------------- > That’s from asset allocation in Schweser only. If > you were to cross reference it was the CFAI > material, you will notice it glaringly missing (no > calculation method). The past CFAI exams > calculated it the previous way Data Monkey has. > > The L3 instructor blogs on the first method as > well as being the correct one. So what’s the CFAI correct way?

i think they may be pretty flexible on the exam - during the schweser review they said you could do arithmetic or geometric returns - as long as you stated it as such. I’ll bet they are pretty flexible with the tax impact as well. As long as you justify.

Well I am not here to make up everyone’s mind. I work with portfolio advisors and I know there are alot of rules of thumb that go into these things, but from absolutely everything I’ve seen it’s the former method, that’s CFAI, past exam in the CFAI and even schweser (non asset allocation).

1/(1-T) = Before Tax Required Return Data_Monkey Wrote: ------------------------------------------------------- > do they do it like > > [(1+(\$50,000/\$600,000)/(1-t)]*(1 + Inflation)?? > > > [(1+(\$50,000/\$600,000)]*(1 + Inflation)?? (NOT > INCLUDING TAX IMPACT? > > I get confused on when to use the 1/(1-t) > factor…

Data_Monkey Wrote: ------------------------------------------------------- > i think they may be pretty flexible on the exam - > during the schweser review they said you could do > arithmetic or geometric returns - as long as you > stated it as such. I’ll bet they are pretty > flexible with the tax impact as well. As long as > you justify. I don’t think so, they are really only flexible on the geo/arith. thing. The 2 or so before tax Q’s I’ve seen they have taken after tax RR, then grossed up by taxes and then added inflation.

Schweser has it on their quicksheet

Pimp - sometimes i’ve seen it used and sometimes it isnt… I think if the question specifically says “what is the before tax return requirement”, otherwise, dont use it… OR Maybe I should just always use it… hell if I know…

Hey, do whatever you want, I’m not forcing anyone to do anything anyway and I would rather study than argue.

Lets hug it out

… argue? … did i use all caps? Hug? Im at the point I just want to beat each other up with those big pugil sticks like on American Gladiators… Im so friggen sick of looking at books…

You will be off that platform pretty quick!!! ha j/k would be fun though

asked or not for return calc I plan on putting Nominal = X Real = X/(1-T)

I can’t believe nobody researches anything… look at the CFAI book… The CFAI has always done the following method: INFLOW - OUTFLOWS (Taxes considered as outflows) / Assets + Inflation This gives the same after tax effect as not grossing up inflation… Check out the Inger case.

It works out algebraically too if the RR is measured only in after tax dollars.