After reading this chapter, it isn\'t surprising that you\'re becoming an invest
ID: 2805135 • 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 $51.02 per share. Over the next 12 months assume the price goes up to $ 61.21 per share, and you receive a qualified dividend of $0.47 per share. What would be your total return on your KSU Corporation investment? Assuming you continue to hold the stock, calculate your after-tax return. How is your realized after-tax return different if you sell the stock? In both cases assume you are in the 25 percent federal marginal tax bracket and 15 percent long-term capital gains and qualified dividends tax bracket and there is no state income tax on investment income.
Question 1 -Your total rate of return on your KSU Corporation investment is_____%. (Round to two decimal places.)
Question 2 - Assuming you continue to hold the stock, your after-tax rate of return is ____%. (Round to two decimal places.)
Explanation / Answer
1) Stock Price Gain=61.21-51.02=$ 10.19
Dividend = $ 0.47
Total Gain = 10.19 + 0.47= $ 10.66
Total Rate of Return= 10.66 /51.02=0.2089= 20.89%
2) There will be no taxes as I am not selling the share and realizing a profit. There are no taxes on unrealized profit. I will only need to pay taxes on the dividend I received.
Stock Price Gain=61.21-51.02=$ 10.19
After tax Dividend = $ 0.47 (1-0.15)= 0.3995
Total Gain = 10.19 + 0.3995= $ 10.5895
Total After Tax Rate of Return=10.5895/51.02=0.2075= 20.75%.