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 ​$31.17 per share. Assume the price goes up to $40.07 per share over the next 12 months and you receive a qualified dividend of ​$0.41 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.

Answer 1

Answer:

before-tax 29.87%

after-tax     26.37%

Explanation:

The return will be the capital gain and the dividend gain.

capital gain: ending market price - purchase price

$ 40.07 - $ 31.17 = $ 8.90

dividend gain:   $0.41

total return: $8.90 + $0.41 = $9.31

investment: $ 31.17

rate of return before-tax:  9.31 / 31.17 = 0,29868 = 29.87%

return after tax:

dividends 0.41 x ( 1 - 0.25) = 0.3075

capital gain: (as we hold the share we can use long.term capital gain rate

9.31 x ( 1 - 0.15) = 7,9135

total return: 7.9135 + 0.3075 = 8.221

rate of return after-tax 8.221 / 31.17 = 0,2637471928136 = 26.37%