The text:
"Wilson wants to enter law school, which should take three years and cost $45,000 the first year, increasing annually by the rate of inflation of 3%."
"Wilson is particularly interested in establishing a law practice after graduation from law school. He estimates start-up costs for the practice will total $200,000. He expects his living expenses and care for his brother, which totalled $175,000 this year, to increase at the general rate of inflation of 3% per year."
Question:
Formulate the return portion of Wilson's investment policy statement (IPS) for his taxable investment portfolio and calculate the total after-tax return that portfolio must earn next year, his first year in law school. Show your calculations.
Answer:
Portfolio value = $7,875,000
Required after-tax real return = [ $45,000 + ($175,000) (1.03)] / $7,875,000 = 2.86%
Required after-tax nominal return = (1.0286) (1.03) - 1 = 5.95%
My question:
1.
Why is the solution only multiply the living expenses by 3% and ignoring the college fees which clearly states that it will increase by 3% as well?
2.
On top of that, isn't that double inflating and shouldn't the calculation be:
($45k + $175k) / 7,875k = 2.794%
and then to include inflation
1.02794 * 1.03 = 5.88%
@RaviVooda @Alta12
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