I’m doing Vol 2 of the questions and am a little confused about the personal IPS statements for Rodolfo Serra (2006 exam, pg 10 vol 2) vs Elisabeth Yeo (2005, pg 16 vol 2) Serra the soccer player is 34 and retiring one year from now. Yeo is 55 and also retiring one year from now. However in the answer the calculation for Yeo start at time 0 or when he is 34 and includes his last salary as a cash inflow to retirement 1 year from now. For Elisabeth Yeo, her time period starts 1 year from now and goes to two years from now ( or end of 1st year of retirement) and her first year salary and living expenses are excluded. Can you please clarify why Serra starts 1 year pre-retirement and Yeo starts at retirement to 1 year after retirement when they are both retiring one year from now? Also, in these two cases when should we include or exclude the last year’s salary (i.e. include in Serra’s case and exclude in Elisabeth’s case) thx!
anybody offer some insight?
Serra’s time frame starts one year from now and only includes his YEAR END bonus as part of the cash flow (netted out against the cost of the house). Yeo’s retirement happens in a year so you include this years negative cash flow (i think it was negative) to reduce the asset base then you do the same for the following year to determine ongoing required return. The quesiton also asked for just thre required return for year T+1 and only that year so its not an ongoing return like Serra’s.
Thanks for the response. But if you look at the answer at year 0 (year before retirement) Serra’s income is 4 mill salary plus 1 mill signing bonus. If this wasn’t included then there would be a net outflow in year 0 and his total investable assets would be much smaller at retirement. I still don’t see why Serra’s horizon is from t0 to t+1 whereas Yeo is from t+1 to t+2 if the question explicitly asks for their rate of return during their first year of retirement. How do we know what they mean when they say first year of retirement because it seems to mean different things?
----Also, in these two cases when should we include or exclude the last year’s salary (i.e. include in Serra’s case and exclude in Elisabeth’s case) Because the difference in the time line, Elizabeth case exclude the last year’s salary in the calculation of cash flows. I did 2005 case yesterday. I used the calculation method in Serra’s case. But later found the answer is different.
Not to belabor this to death but I think it’s important that we address this because this could throw the IPS out of wack. GGB I did exactly the same as you after getting the answer to Serra’s case correct and the facts in Yeo’s case is exactly the same. Both graduating in one year and calculate rate of return in the first year. The only difference I can think of is that Serra’s salary is paid out throughout the year plus year end bonus so we add that to his last year of employment. In Yeo’s case there’s no mention of when the salary is paid so we assume that it’s paid in the beginning of the year? Either way I don’t see any difference in the question that would warrant different calculation methods.
I still don’t see why Serra’s horizon is from t0 to t+1 whereas Yeo is from t+1 to t+2 if the question explicitly asks for their rate of return during their first year of retirement. How do we know what they mean when they say first year of retirement because it seems to mean different things? aarrghh this is still not definitive … AC123 i dont get this either …anybody have a definitive answer as to why this was done differently ? I always thought that 1 st year of retirement would exclude last year’s salary unless something else is explicity stated .
I’m finding myself struggling with these 2 cases. They’re quite vague. Probably the Serra’s case is the most vague one. I do not understand how we’re supposed to interpret his timeline, when does the client requires his first cash flow and when he receives his last paycheck? This case “assumes” the client needs money at retirement, that is beginning of the period(time=0). Ok, this is fine with me, but are we told that anywhere in this case? Also, does not he get the salary at the end of the period, at the same time he’s retiring? The question asks for “return during his first year of retirement”. Why does the answer calculates the return over his preretirement year 34-35, not 35-36 (his first year of retirement)? I think this is what I just don’t get. Anyways, plan B. How many points are these individual return calculations are worth? It says 13 min for 1 (formulate) and 2 (return). I mean I can spend an hour on this question trying to glean what exactly they are trying to say by “end of year”, “one year from now” and still get it wrong. Is this intentionally so vague?
My problem with Yeo’s qustion was why did they not use the higher education inflation of 6% in the answer.
Needhelp - they did - 150,000*1.06=159,000 (college expense 2 years from now.