Reading 9, EOC 13, Part A.i (Managing Individual Investor Portfolios)

[Lea124]

Can anyone explain how the return is calculated for this question?
Annual income requirement = 26,000
Investment base = 1,235,000
Want to have 2,000,000 in 18 years
40% tax rate
The answer gives a return requirement of 7.38% (4.427%/(1-0.40))
What’s the calculation behind the last part?

 

[sachin_patel]

(1) calculate after tax required return.
PV = - 1,235,000
PMT = 26,000
FV = 2,000,000
N= 18
cpt-> I/Y.
answer 4.427%
(2) calculate pretax return.
to get 4.427% after tax return you need pre tax return of 4.427/(1-0.4) = 7.378%

 

[Lea124]

Thanks! I tried that originally but forgot to clear work on my calculator.

 

[Audacious]

Lea124 wrote:
Thanks! I tried that originally but forgot to clear work on my calculator.

in this example, you dont need to clear work as you’re filling all the fields except the one that you CPT. So, Why did you get it wrong? huh? plz cooperate with us and say the truth. Do you need a smoke?

 

[arigolden]

Lea124 wrote:
Can anyone explain how the return is calculated for this question?
Annual income requirement = 26,000
Investment base = 1,235,000
Want to have 2,000,000 in 18 years
40% tax rate
The answer gives a return requirement of 7.38% (4.427%/(1-0.40))
What’s the calculation behind the last part?

Do you just assume that the I/Y you initially calculate is after-tax? Why? Is it simply because you assume the investor needs a return that is net of all expenses/costs (i.e. taxes and inflation?)