Question

You buy a stock for $30 per share and sell it for $33 after holding it for slightly over a year and collecting a $0.75 per share dividend. Your ordinary income tax rate is 28% and your capital gains tax rate is 20%. Your after-tax rate of return is _________.

Answer 1

The answer is: After-tax rate of return = 9.8% .

Step-by-step explanation:

Please find the calculations which are shown in details as below:

Pre-tax dividend earning is $0.75, Tax rate on ordinary income is 28% => After-tax dividend earning = 0.75 x (1 - 28%) = $0.54;

Pre-tax capitals gain is $3 ( that is, $33 -$30), tax rate on capital gains is 20% => After-tax capital gains = 3 x ( 1 - 20%) = $2.4 ;

=> Total after-tax return = After-tax capital gains + After-tax dividend earning = 2.4 + 0.54 = $2.94 .

Thus, in percentage term, after-tax rate of return is 2.94/30 = 9.8%.