Question

# After reading this​ chapter, it​ isn't surprising that​ you're becoming an investment wizard. With your newfound​...

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

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)