return requirement calc

CFA Level III Economics
#1

I am trying to make a summary of (generally) how to handle a return requirement calc:

gross income less taxes= post-tax income

post-tax income less Xs = net needs for yr 1

net needs for yr 1 over investable base = return requirement

Here’s my question- 1) I’ve noticed in some exampled we also add expected inflation to this return requirement, but in other example we don’t…shouldn’t that always be done or is it only if client wants his port to grow w/ inflation?

  1. if given last year’s expenses, AND last year’s salary…do we grow both of those by inflation? (I think we do but want to confirm)

Thanks!

#2

another quick Q- is it true that life insurance payouts are left off the holistic balance sheet?

#3

Investible base

  • Current investment portfolio (exclude house as it cannot be invested in that sense)

  • Any inflow that is specified in the question (e.g. new inflow of additional savings to the investment portfolio, for instance, net saving)

Cash outflow

  • Expenses (living expenses)

  • Any immediate cash flows

  • Mortgage payments

  • Tuitions

Cash inflow

  • Salary net tax

Net cash flow

  1. Calculate Difference between cashflow out and inflow
  2. If you need to withdraw money from the portfolio, please divide net value by (1-tax)

Required rate of return method #1

PV = Investible base [contribute money, so negative sign]

PMT = Net cash flow [contribute money = negative sign; take out money = positive sign]

N = Usually 1

FV = Usually investible base * (1+inflation) * (1 + real growth) [take out money = positive sign]

I/Y = Compute

Required rate of return method #2

Required Required return before tax / investible base [meaning cf point #2 / investible base]

Let me know if i missed something, they are damn hard these questions…