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 ​$28.54 per share. Assume the price goes up to $ 36.51 per share over the next 12 months and you receive a qualified dividend of ​$0.54 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. Your realized​ after-tax rate of return if you sell the stock is

Answer 1

1. If the stock is not sold and only Dividend income is received. This is Qualified Dividend and hence shall be taxed at 15%.

Dividend income = $0.54 * 100 = $54. This shall be taxed @15%. Hence after tax return shall be $45.9.

2. If the stock is sold and Dividend income is received. Both these components shall be taxed at 15% since the share has been held for one year, qualifying as Long term

Particulars	Amount ($)	Calculation
Invt price…...(i)	2854	100*28.54
Price after 1 year…...(ii)	3651	100*36.51
Dividend	54	100*0.54
Capital gain	797	(ii)-(i)
Gain	851	797+54
Tax @15%	-127.65
Return post tax…...(iii)	723.35
Return post tax (%)	25.35%	(iii)/(i)