After reading this chapter, it isn\'t surprising that you\'re becoming an invest
ID: 2804989 • Letter: A
Question
After reading this chapter, it isn't surprising that you're becoming an investment wizard. With your newfound expertise you purchase 100 shares of KSU Corporation for $57.86 per share. Over the next 12 months assume the price goes up to $ 68.39 per share, and you receive a qualified dividend of $0.51 per share. What would be your total return on your KSU Corporation investment? Assuming you continue to hold the stock, calculate your after-tax return. How is your realized after-tax return different if you sell the stock? In both cases assume you are in the 25 percent federal marginal tax bracket and 15 percent long-term capital gains and qualified dividends tax bracket and there is no state income tax on investment income.
Question - Assuming you continue to hold the stock, your after-tax rate of return is ____%. (Round to two decimal places.)
Explanation / Answer
After tax return if share are hold
amount of investment at time of purchase
100*57.86
5786
value of investment after a year
100*68.39
6839
increase in value
6839-5786
1053
amount of dividend
.51*100
51
return on investment
(dividend income+increase in value of investment)/purchase price of investment
(51+1053)/5786
19.08%
after tax rate of return
19.08*(1-tax rate)
19.08*(1-.25)
14.31
After tax return if shares are sold
amount of investment at time of purchase
100*57.86
5786
value of investment after a year
100*68.39
6839
increase in value
6839-5786
1053
amount of capital gain after tax
1053*(1-capital gain tax rate)
1053*(1-.15)
895.05
amount of dividend
.51*100
51
return on investment
(dividend income+ increase in value of investment)/purchase price of investment
(51+895.05)/5786
16.35%
after tax rate of return
16.35*(1-tax rate)
16.35*(1-.25)
12.2625
After tax return if share are hold
amount of investment at time of purchase
100*57.86
5786
value of investment after a year
100*68.39
6839
increase in value
6839-5786
1053
amount of dividend
.51*100
51
return on investment
(dividend income+increase in value of investment)/purchase price of investment
(51+1053)/5786
19.08%
after tax rate of return
19.08*(1-tax rate)
19.08*(1-.25)
14.31
After tax return if shares are sold
amount of investment at time of purchase
100*57.86
5786
value of investment after a year
100*68.39
6839
increase in value
6839-5786
1053
amount of capital gain after tax
1053*(1-capital gain tax rate)
1053*(1-.15)
895.05
amount of dividend
.51*100
51
return on investment
(dividend income+ increase in value of investment)/purchase price of investment
(51+895.05)/5786
16.35%
after tax rate of return
16.35*(1-tax rate)
16.35*(1-.25)
12.2625