How much capital would Bill need to cover his net income indefinitely assuming a 5% return and a 40% tax rate?

To determine how much capital Bill would need to cover his net income indefinitely, it's essential to consider the after-tax income he wishes to derive from his investments.

First, we need to account for the tax impact on his income. If Bill’s desired net income is represented as "I", then with a 40% tax rate, his effective income requirement before taxes is given by the formula:

I / (1 - tax rate)

So, if we denote the net income he requires as I, we would calculate the pre-tax income as I / (1 - 0.40), which simplifies to I / 0.60.

Next, since Bill is seeking to cover this pre-tax income indefinitely with an investment that yields a 5% return, we can use the formula for the capital needed to generate this level of income, which is:

Capital = Pre-tax Income / Return Rate

Substituting the pre-tax income into this formula gives us:

Capital = (I / 0.60) / 0.05

Capital = I / (0.60 * 0.05)

Capital = I / 0.03

To find the capital required to cover his income indefinitely, we can assume a specific amount for