# Return Objective - Schweser Practice Exams Book 2 AM Exam 1 Q1A

Portfolio Value = \$5m Pretax income = \$150,000 Living Expenses = \$100,000 Non tax deductible medical expenses = \$100,000 Stipend to son = \$50,000 Inflation = 2% Tax rate = 33% Calculate the after tax nominal return I get 6.46%, schweser say 5.1% Would like to see how other people get there answer before posting up schwesers answer.

Before tax income: 150 -->> after tax: 100,5 = 150 * 0,67 Expenses: 100 (living) + 100 (medical expense) + 50 (stipend to son) = 250 Diff. between Income and expenses to be covered by income from PF= 149,5 Return: 149.5/5000 = 0,0299 = 2,99% (1+Return) * (1+Inflation) = 5,05 --> 5,1% How did you get to 6.46? Paul PS: Edited because I clicked to fast on “Save changes”

Living expenses + Non tax deductible medical expenses + Stipend to son = \$250,000 After-tax Income = \$150,000 * (1-33%) = \$100,500 Net Expense = 149,000 After-tax real return required= 149,000/5m = 2.99 After-tax nominal return required = (1.0299)(1.02) - 1 = 5.1%

ok, maybe I’m missing something here but wouldn’t the return on the portfolio be subject to tax as well. My calculation for the expenses to be covered are the same as yours so i get: After-tax income = \$100,500 = (\$150,000 * (1-0.33)) Living expenses = \$100,000 medical expenses = \$100,000 stipend = \$50,000 required return = 149,500 but then I went further by dividing it by (1- 0.33) to get \$223,134 so that my … oh b*ll*cks I see where my mistake is here. i was calculating the pre tax nominal rate of return. Thanks guys

Only difference I had was bumping the medical up by 5% since they gave us this years exp of \$100m and next year would be 5% more. Comes out to about the same answer of 5.1%, but they may hit us on it if the calc is not perfect???

dderato Wrote: ------------------------------------------------------- > Only difference I had was bumping the medical up > by 5% since they gave us this years exp of \$100m > and next year would be 5% more. Comes out to > about the same answer of 5.1%, but they may hit us > on it if the calc is not perfect??? Depends on the question…if it says “Show you calculation” you won’t get full credit even if your answer is correct. If they state: “What is the required return?” your answer can be minimized.

I am having the same problem. It seems that Schweser and the CFA institution change their minds regarding when to use taxes in equations. The problem you had indicated that the investor took his after tax return, calculated his needs after that, got a return percentage, and then slapped inflation on top of that. HOWEVER, in the 2009 exam, if you use the same logic, the required return will be too small and you need to factor in a 20% return into the equation. I wish that the guys at Schweser and the CFA institute would make up their minds and come up with a consistent equation.

Peterstepon you are making the same mistake I made when I posted this question. The 2009 question asks you to calculate the pretax return. this question asks for the after tax return. the devil is in the detail.

Kwonyboy, I see, I will review my notes tonight. Thanks for the clarification.

does the solution actually make sense to anybody? So you calculate next year’s costs including that year’s medical expenses then use the regular inflation going forward. That’s just not right mathematically. Wouldn’t medical expenses keep rising at a higher rate?