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) |

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