Final answer:
The after-tax yield of the investment is 8.5%, calculated by considering the taxes paid on non-qualifying dividends at a 30% tax rate and factoring in capital gains, resulting in a total after-tax return of $850 from the initial $10,000 investment.
Step-by-step explanation:
The question regards calculating the after-tax yield of an investment after considering dividends and capital gains, as well as tax implications. An initial investment of $10,000 results in a value of $10,500 at year-end, with $500 received in non-qualifying dividends. If the investor is in a 30% tax bracket, the taxes paid on the dividends would be 30% of $500 = $150. Thus, the after-tax income from dividends is $500 - $150 = $350.The total after-tax return is the sum of capital gains (which is the increase in the value of the investment) and after-tax dividends. The capital gains here are $500 ($10,500 - $10,000), and there is no tax considered on that for this calculation. Therefore, the total after-tax return is $500 (capital gains) + $350 (after-tax dividends) = $850.To find the after-tax yield, we divide the after-tax return by the initial investment and multiply by 100 to get a percentage: ($850 / $10,000) * 100 = 8.5%. Hence, the correct answer is C) 8.5%.Final answer:
To find the risk-adjusted return, subtract the 90-day T-bill rate from the actual return to determine the excess return, then adjust this figure according to the investment's beta. The calculation based on the question's data seems to indicate a 14% risk-adjusted return, which does not match any of the given options.
Step-by-step explanation:
To calculate the risk-adjusted return, you must adjust the actual rate of return on the investment by the risk-free rate of return, which is often represented by the 90-day T-bill rate, and then adjust further for the investment's risk, represented by the beta. In this case, we start with the given actual return of 14% and subtract the risk-free rate of 4%. The result is known as the excess return, which compensates the investor for taking on higher risk compared to the risk-free asset.Our calculation to find the risk premium (excess return) would be:Actual return: 14%Risk-free rate: 4%We subtract the risk-free rate from the actual return:14% - 4% = 10%This 10% is the excess return.
But, since we need to adjust for the investment's risk as represented by its beta of 1.4, we take this one step further. The risk-adjusted return is therefore not just the excess return but the excess return adjusted for the investment's beta.The risk-adjusted excess return is calculated by multiplying the excess return by the beta:10% * 1.4 = 14%Since the T-bill rate is already considered in the excess return, adding it back would not be correct, leaving us with a risk-adjusted return of 14%. However, this contradicts the options provided, so it might indicate a need for further clarification on the calculation method expected or a possible oversight in the provided options.