Re. return calculation Can someone who’s done this one explain to me why we do not tax the return on the portfolio? i.e. if the portfolio needs to yield $116,438, surely this is after tax and the portfolio must actually yield 116,438 / (1-0.25) = 155,250.67 pre tax? (which would obviously make required return higher). I understand that the tax on salary has already been accounted for but don’t we have to assume that the porftfolio return is also taxed (as income and capital gains are stated as being taxed)? I must be missing something here - please help!
Damonsin99 I won’t be getting to your specific problem until later on today but I think I can help. It all depends on whether they ask for required return on an after or before tax basis. I know how you’re looking at this because this one has always confused me. Assuming the $116,438 contains the salary net of tax and all other expenses are stated after tax, your required return will automatically be after tax. If you divide by (1-.25) you are providing the before tax return. The question should specify whether they want an after or before tax required return. I think its just that simple.
Thanks for the response Mmeridith. I think the question just refers to ‘required return’ so hopefully this is just Schweser being vague. I think you’re right, the CFAI should be more specific in their questions.