Question

A stock's price increases from $76.59 to 97.34 over a period of three years, during which inflation is 2.5 percent. Assuming you have to pay a capital gains tax of 15 percent on the increase in value, how is your real purchasing power growing over these three years if you invest in the stock?

Answer 1

To calculate your real purchasing power growth over three years when investing in a stock, consider the impact of inflation and capital gains tax. Calculate the rate of inflation and then determine the after-tax gain. Adjust the after-tax gain for inflation to find your real purchasing power growth.

Step-by-step explanation:

To calculate your real purchasing power growth over the three years, you need to consider the impact of inflation and the capital gains tax. First, calculate the rate of inflation using the formula: (end price - start price) / start price. In this case, the rate of inflation is (97.34 - 76.59) / 76.59 = 0.2715 or 27.15%. Next, calculate the after-tax gain by subtracting the capital gains tax from the increase in value: (97.34 - 76.59) * (1 - 0.15) = 16.51925. Finally, calculate the real purchasing power growth by adjusting the after-tax gain for inflation: 16.51925 / (1 + 0.02715) = 16.10807. Therefore, your real purchasing power grows by approximately 16.11% if you invest in the stock.