Suppose you are a stock broker for WillyP Financial. Your client bought a share
ID: 2820989 • Letter: S
Question
Suppose you are a stock broker for WillyP Financial. Your client bought a share of stock of Intel at $50 and a share of stock Microsoft at $115. A year later, after your client received a $3 dividend from Intel and $3 from Microsoft, he sold the stock Intel at $55 per share and Microsoft $125. What are the expected after tax returns for your client if your client is
(Keep your answer to only two decimals)
(a) a church investment fund (tax-exempt status) . (example of answer format: xx.xx%, such as 12.34%)
(b) a corporation paying tax at 35% (remember that corporations may exclude 70% of dividends received from domestic corporations in the computation of their taxable income) .
(c) an individual paying tax at 35% on dividend income and 15% on capital gains .
(d) a security dealer paying tax at 35% on both investment income and capital gains
Explanation / Answer
(a) A Church Investment fund has tax exemption status hence the returns will be as follows
Intel Stock total return= Dividend Income+Capital gain
=3+5= 8
So the Return = 8/50= 16%
In Microsoft return = 3+10/115= 11.30%
(b) Corporation paying tax @35%
Dividend income is taxable for only 30% amount hence tax on divdiend is 0.90*35%= 0.315 Hence the after tax return of dividend = 3-0.315=2.685 where as capital gain income in case of Intel= 5-(5*35% )= 3.25
so the return = 3.25+2.685/50=11.87%
In case of Microsoft the return will be 2.685+6.5/115=7.99%
(c) for an individual
Return in case of Intel= 1.95+4.25/50=12.40%
Return in Microsoft= 1.95+8.5/115=9.09%
(d) Security dealer return
On Intel Shares= 8-35%/50=10.40%
On Microsoft shares= 8.45/113=7.35%