Question

"You are investing $X immediately in a stock that you will keep for 10 years. At the end of 10 years, the stock will be worth $12,373 with a probability of 0.52 and worth $19,197 with a probability of 0.48. When you sell the stock, you will need to pay taxes on the profit earned from selling the stock (i.e., taxes on the difference between the selling and buying prices of the stock). The tax rate will be 14% with a probability of 0.89 or 28% with a probability of 0.11. Your MARR is 7.3%. You will only invest in the stock if your expected net present worth is larger than 0. Find the largest possible value of X."

Answer between 7006.0 and 7148.0

Answer 1

MARR = 7.3 % per annum

Investment Horizon = 10 years

After, 10 years the stock will be worth $ 12373 with a probability of 0.52 and $ 19197 with a probability of 0.48.

Expected Stock Value After 10 Years = P10 = 12373 x 0.52 + 19197 x 0.48 = $ 15648.52

After, 10 years tax rate will be 14 % with a probability of 0.89 and 28% will be with a probability of 0.11.

Expected Tax Rate = T = 0.89 x 14 + 0.11 x 28 = 15.54 %

Initial Investment $ X

Therefore,

Solving the above equation, we get value of X $ 7075. 345