jamespucyk Wrote: ------------------------------------------------------- > Fine, if you want to drop References… in > addition to the INGER case: > > CFAI Level 3 exam 2002, Morning Session Question > 5 > > CFAI Level 3 Exam 2003, Morning Session Question > 9 > > 2007 exam indicated pretax income, but gave pretax > expenses so there was no tax adjustment necessary > > -------------------------------------------------- > ------------------------------------ > > This is Dr. Khulman’s Method as per his Blog: > > 1) Adjust expenses for inflation (take them into > the future) > 2) Divide by asset base (after adjusting for > non-investables and liquidity items) > 3) Divide by 1-t > 4) add inflation. > > -------------------------------------------------- > ------------------------------------------- > Formula is: > > R/Asset/1-t + I = R/1-t/Assets + I So after 40 posts, is the conclusion that this is how we do it? I’m still not clear. And might I say, friggin’ ridiculous that this is like the single most important concept and the CFAI is alll over the place. Way to drop the ball, CFAI!
volkovv Wrote: ------------------------------------------------------- > jamespucyk Wrote: > -------------------------------------------------- > ----- > > Fine, if you want to drop References… in > > addition to the INGER case: > > > > CFAI Level 3 exam 2002, Morning Session > Question > > 5 > > > > CFAI Level 3 Exam 2003, Morning Session > Question > > 9 > > > > 2007 exam indicated pretax income, but gave > pretax > > expenses so there was no tax adjustment > necessary > > > > > -------------------------------------------------- > > > ------------------------------------ > > > > This is Dr. Khulman’s Method as per his Blog: > > > > 1) Adjust expenses for inflation (take them > into > > the future) > > 2) Divide by asset base (after adjusting for > > non-investables and liquidity items) > > 3) Divide by 1-t > > 4) add inflation. > > > > > -------------------------------------------------- > > > ------------------------------------------- > > Formula is: > > > > R/Asset/1-t + I = R/1-t/Assets + I > > james, here is the quote from CFAI from Ingers > case, CFA V2, p.167 > > “Note: Strictly speaking, the inflation rate > should be adjusted upward by the porfolio’s > average tax rate. For ease of presentation, we > have simply added 3% inflation” > > This probably explains why in Susan Fairfax case, > they actually added inflation and then adjusted > for taxes > > This also tells me that method you are referring > to can work, since CFAI used it but this is really > a simplification. > > However, if you read to much into their “…fore > ease of presentation” and interpret it that they > are introducing a concept, but really telling you > this is only done for presentation purposes, then > they maybe telling us not to use it this way. > > Anyway, I think correct formula should be > > (r+i) / (1-t) > > or > > (r + i + management fee) / (1 - t) > > also all arithmetic terms in the numerator could > be done geometrically > > You can’t go wrong after they make this statement > “Strictly speaking, the inflation rate should be > adjusted upward by the porfolio’s average tax > rate” I will use this one 
Yeah, I know. The ambiguity is unbelievable. Whoever Dr. Kuhlman is, that seems like the method to use. It would be one thing if I got it wrong because I didn’t study enough, but I’ve seen this calculated 5 ways 'till Tuesday in these books, which is ridiculous.
Sorry for adding to the confusion. If you look at Schweser Vol I Exam 2 AM, Question #1, the required return calculation is an after-tax nominal rate of return (income is adjusted for taxes and then inflation is added after the fact). Then on Schweser Vol I Exam 2 AM, Question #6, the required spending rate is grossed up by (1-t) and they end up calculating a before-tax nominal rate of return. My question is when should you gross up for taxes and calculate a before-tax amount and when should you calculate an after-tax amount?
vector Wrote: ------------------------------------------------------- > Sorry for adding to the confusion. If you look at > Schweser Vol I Exam 2 AM, Question #1, the > required return calculation is an after-tax > nominal rate of return (income is adjusted for > taxes and then inflation is added after the > fact). > > Then on Schweser Vol I Exam 2 AM, Question #6, the > required spending rate is grossed up by (1-t) and > they end up calculating a before-tax nominal rate > of return. > > My question is when should you gross up for taxes > and calculate a before-tax amount and when should > you calculate an after-tax amount? The exam question will specify what to calculate. Hopefully everything is after-tax so we won’t have to worry about all this stuff.
My guidance will be the latest real CFA exams. How were the calculations done for in the guideline answers for the 2005-2007 exams? That’s what I’m going with. I also expect the exam to be very specific in what they’re looking for. I believe both 2005 and 2006 (haven’t done 2007 yet) were looking for after-tax nominal rate of return, and that’s what the question asked.
unless they ask for a specific one, why not give both before tax and after tax?
thetank Wrote: ------------------------------------------------------- > unless they ask for a specific one, why not give > both before tax and after tax? They will be specific. They will not just say “what is the required return” unless they give no tax or inflation info. In that case, none of this matters.
Return objective: make money