Final answer:
The future value of John's $20,000 investment after 5 years with reinvested dividends at 4% annually, assuming a 0% tax rate on dividends and not considering taxes on capital gains, is approximately $24,331.06. This value is calculated using the compound interest formula and is closest to option A from the provided choices.
Step-by-step explanation:
The student is asking about the future value of an investment considering compound interest from reinvested dividends. John invested $20,000 in a stock paying annual qualifying dividends of 4% which, by law, have a 0% tax rate. Therefore, the entire dividend can be reinvested annually. As his marginal ordinary tax rate is not applicable to the qualifying dividends, it does not affect the reinvestment.
To calculate the value of his investment after 5 years, we will use the formula for compound interest: P(1 + r)n, where P is the principal amount ($20,000), r is the annual interest rate as a decimal (0.04, since 4% of the investment is paid as a dividend), and n is the number of years the money is invested (5 years).
Future Value = $20,000 (1 + 0.04)5
When we calculate the above formula:
Future Value = $20,000 (1.04)5 = $20,000 (1.2166529) = $24,331.06
Therefore, the closest answer to the value of John's investment after 5 years, assuming dividends are reinvested annually, is approximately $24,331.06, which is not one of the options provided. Hence there might be a typo in the options, but based on the calculation, the value is closer to option A: Approximately $24,436.