Question

4. You purchased a stock at the end of the prior year at a price of $101. At the end of this year the stock pays a dividend of $1.80 and you sell the stock for $117. What is your return for the year? Now suppose that dividends are taxed at 15 percent and long-term capital gains (over 11 months) are taxed at 30 percent. What is your after-tax return for the year?

Answer 1

Answer:

Pre-tax = 17.62%

After tax = 12.60%

Explanation:

The pre-tax return is determined by the difference from selling and purchase price, added to received dividends, and then divided by the purchase price:

$R_{PT} = \frac{(117-101)+1.80}{101}\\R_{PT} =0.1762=17.62\%$

For the after-tax return rate, correspondent dividend and long-term capital gains taxes should be considered:

$R_{AT} = \frac{[(117-101)*(1-0.30)]+[1.80*(1-0.15)]}{101}\\R_{AT} =0.1260=12.60\%$