2 tax formulas... Accrual equiv after tax return and Acc. Equiv Tax rate

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BaseballRedhawks

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seems so easy… wondering why im spending 2 hours figuring out what/how these formulas work and these quesitons…. why???
 
You are falling victim to the “there-is-still-plenty-of-time” trap… 94.6% of CFA candidates (at any level) display it in varying degrees of seriousness.
It is not lethal and it rapidly disappears as (in the words of a fine tutor) ‘…one starts to smell the tulips…”
 
It’s pretty straightforward: you start with $100,000, earn 7% per year for 30 years, pay a bunch of taxes (some annual, some deferred, whatever), and end up with $600,000.
The accrual equivalent return is the annual compound return that gets you from $100,000 to $600,000:
$100,000(1 + RAE)³º = $600,000
RAE = 6.1545%
The accrual equivalent tax rate is the tax rate that gets you from 7% per year to 6.1545% per year:
6.1545% = 7%(1 − TAE)
TAE = 12.08%
 
Magician, I believe whatever the CFAI does not clarify , you do. You make all of our lives easy and fun (at least on the CFA front). There is a collective thanks for that. I learn so much each time I see your post. Personally , I am overwhelmed.
Keep the wisdom flowing to us.
 
Thanks - starting to make sense after doing lots of practice questions. Def. a lot of ways they can ask them.
 
I would not say that any of this is making our lives fun ;) but magician is definitely making our lives easier.
Greatful as well! Thanks
 
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