Question

Linda​ Babeu, who is in a​ 33% ordinary tax bracket​ (federal and state​ combined) and pays a 15​% capital gains rate on dividends and capital gains for holding periods longer than 12​ months, purchased 10 options contracts for a total cost of $ 2,800 just over one year ago. Linda netted ​$3,600 upon the sale of the 10 contracts today. What are​ Linda's pretax and​ after-tax HPRs on this​ transaction?

​Linda's pretax HPR on this transaction is_​%.

Linda's after-tax HPR on this transaction is_​%.

Answer 1

Solution:

1)

Calculation of Linda's pretax HPR:

Holding period return = Capital gain/ Beginning investment value

=$800/$2,800

Holding period return =28.57%

Working:

Calaulation of capital gain :

Capital gain = Ending investment value - Beginning investment value

=$3,600 -$2,800

=$800

2)

Calculation of Linda's after tax HPR :

After tax holding period return = After tax income/ Beginning investment value

=$800*(1-15%) /$2,600

=$680/$2,600

After tax holding period return =26.15%

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