Do you always add inflation last? As in, calculate after-tax return, divide by 1-tax rate, then add inflation? I thought on one example, I added back inflation first to the after-tax return, then divided by 1-tax rate.
Actually here is a good explanation, although I don’t know how to process this for the test.
“Applying the tax gross up before or after inflation can be confusing. It is best addressed by the client and manager making assumptions regarding the effective annual tax rate or in some other manner. In this case, they explicitly agree the inflation component of return is assumed not to be taxed. Therefore, the tax gross up must be done before inflation. The $150,000 is not adjusted for inflation as it is already stated to be expected spending; however, inflation must still be added to real return for nominal return to reflect the effects of inflation in the future. The inflation and real return can be compounded instead of added and it will slightly change the subsequent calculations.”
Will there be a possibility of CFA saying “Assume the component of return related to inflation will not be taxed” or is this just an A-hole Schweser thing?
For the bazillionth time: _ read: _
http://financialexamhelp123.com/inflation-in-required-rate-of-return-to-tax-or-not-to-tax/