Question

hayley recently invested $32,000 in a public utility stock paying a 6 percent annual dividend. (hayley's marginal income tax rate is 32 percent.) use tax rate schedule, dividends and capital gains tax rates for reference. required: if hayley reinvests the annual dividend she receives net of any taxes owed on the dividend, how much will her investment be worth in six years if the dividends paid are qualified dividends? what will her investment be worth in six years if the dividends are nonqualified? note: for all requirements, do not round intermediate calculations and round your final answers to the nearest whole dollar amount.

Answer 1

Haley will reinvest her dividends net of taxes into her $32,000 investment at 6% annual dividends. Qualified dividends are taxed at a lower rate than her marginal tax rate, resulting in more funds to reinvest and a higher investment value after 6 years. Nonqualified dividends would be taxed at her higher marginal tax rate, providing less to reinvest and a lower future investment value.

Step-by-step explanation:

Haley invested $32,000 in a public utility stock paying a 6 percent annual dividend. Since the dividend is qualified, it will be taxed at the capital gains rate, hence lower than her income tax rate of 32%. For qualified dividends, Haley will pay a rate of 15% in taxes since her income places her above the threshold for the 0% rate but below the 20% rate for higher incomes. The annual dividend before taxes is $32,000 * 6% = $1,920. After paying 15% in taxes on the qualified dividends, she will reinvest $1,632 each year ($1,920 - 15% of $1,920). Using the formula for the future value of an annuity, the investment will be worth:

Investment value = P * [(1 + r)^n - 1] / r

Where P is the annual reinvestment ($1,632), r is the annual dividend yield expressed as a decimal (0.06), and n is the number of years (6). However, the growth of the reinvestment is only based on the dividends, and the stock price appreciation is not considered. For nonqualified dividends, Haley would need to pay taxes at her marginal tax rate of 32%, leading to a significantly smaller amount of reinvestment each year. Accordingly, the investment will be worth less after six years.

The difference between the reinvestment of qualified and nonqualified dividends highlights the importance of understanding tax implications on investment returns.