Before and after tax return _ IPS

CFA Level III
#1

Hi I am really confused how to calculate it In some examples to calculate before tax nominal return , we first have real after tax return, then we multiply it by inflation facor then take out tax effect in some other examples , we first take after tax real return then take out the tax effect then add inflation effect So what is the correct way? Should we take the tax effect first OR we should add inflation effect first PLEASE help me if you can

#2

ANY ONE :frowning:

#3

1/1-r

#4

Before tax return=after tax return/(1-T), t=tax rate

#5

Do the tax adjustment first. Inflation is the same percentage after-tax as it is before-tax. So don’t tax effect inflation.

#6

So let’s say we have a real return after-tax of 5% and we want to calculate the before tax real return, what do we do? Infl is 2% and tax is 30%. Is is it (5+2)/(1-0.3) and then subtract inflation? Taxes are calculated on nominal returns. Can somebody confirm? Thanks

#7

I believe it is - : 1-( (1+ (.05/ 1-.3) (1+.02))= 9.28%. Hope I got all the brackets in the right places.

#8

Aren’t taxes calculated on nominal returns?

#9

i thought tax out flow happens in nominal terms so if i have after tax real return of 5% i would add inflation then give effect for tax like Mik82 has done (5+2)/(1-.3). Cheer!

#10

Thanks for the confirmation!

#11

R = r/(1-t) t=tax rate r=annual liquidity needs (needs/port. value) R=before tax real-required return You can then either add or geometrically link (1 + R)(1 + inf) the inflation figure to get the nominal before tax return Hope that helps.

#12

Thanx all If you can see the answer on essay question no 1 in 2009 exam, it is differ from what we said above in the question : 45,000 after tax net income needed 1,000,0000 investment portfolio 20% tax rate inflation 4 % Based on aove: before tax nominal return should be = (4.5%+4%)/1-.20 = 10.625% However the exam answer shows the before tax nominal return = 9.6 % Can any body explain why this diffrece happened and what is the correct way to calculate before tax nominal return STRATING from after tax real return? Thanx

#13

Before tax expenses=45,000/(1-0.2)=56,250 Before tax real rate of return=56,250/1,000,000=5.6% Before tax nominal rate of return=5.6%+4%=9.6% I guess we have to calculate spending before tax first and then calculate the return adj for inflation. Thanks for the info!