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 $34.76 per share. Over the next 12 months assume the price goes up to $ 41.43 per share, and you receive a qualified dividend of $0.58 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 total rate of return on your KSU Corporation investment is nothing%.
P0 = 34.76
P1 = 41.43
D = 0.58
n = 100
Tf = 25%
Tc = 15%
When the stock is sold and gains are realized
Long-term capital gains are taxed at a reduced rate when realized. Short-term capital gains (those held less than or equal to one year) and dividends are always realized and taxed as ordinary income in the year they are paid.
RR = After-tax return on investment = ((P1 - Po) (1 - Tf) / Po) + C1(1 - Tf) / Po
=> ((41.43-34.76)*(1-25%))/34.76 + 0.58*(1-25%)/34.76 = 15.64%
When the stock is held and gains are not realized
RR = After-tax return on investment = ((P1 - Po) (1 - Tc) / Po) + C1(1 - Tf) / Po
=> ((41.43-34.76)*(1-15%))/34.76 + 0.58*(1-25%)/34.76 = 17.56%
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