Return after realized taxes and deferred capital gains

CFA Level III Portfolio Management
#1

hi all,

i am having difficulty understanding the logic behind the example where deferred capital gain is incorporated to calculate return after realized taxes.

i understand the portfolio will grow at the return after realized taxes. then the effective capital gain taxes will apply to the gain. to quote exactly from the example in Schweser notes,

100,000 will grow at 8.67% ( return after realized taxes) for 8 years and become - 194,481.1

Cost basis is 75,000. so gain is 194,481.1-75,000 = 119,481.1. Effective capital gain tax @8.07% will give tax of 10,394.85. so portfolio value post tax is 109,086.2+75000= 184086.2

Answer is 181,855 !!

spent an hour in morning, couldnt get what i am missing !

Regards,

Ajay Gunware

#2

Can you post the variables in the question so that we can attempt to see where it breaks?

It seems like we have to use the blended tax formulas: T*, r* and the FVIF blended.

#3

Need more details in order to help. All we can do with the information provided is confirm you know basic math.

#4

Which is funny because an 8.07% tax rate is actually ~$9,600, not ~$10,400

#5

Also its the effective capital gains tax of 8.07% - we won’t know if that was calculated correctly either until we see the original question.

#6

I didn’t even bother to check the math LOL

#7

I came across this example this morning. if you’re reading Schweser, I’m not sure how you spent an hour to not understand it… The formula is literally in the example:

FVIF = [(1+Rart)^N(1-Tecg)+Tecg-(1-b) Tcg]

This returns: 100,000 [(1+.0867)^8(1-.0807)+.0807-(1-.75) .2] This is the information you ommitted in your question

The answer is 100,000*(1.8185644) = 181,856.44