Question

4. You purchased a stock at the end of the prior year at a price of $101. At the end of this year the stock pays a dividend of $1.80 and you sell the stock for $117. What is your return for the year? Now suppose that dividends are taxed at 15 percent and long-term capital gains (over 11 months) are taxed at 30 percent. What is your after-tax return for the year?

Answer 1

Pre-tax = 17.62%

After tax = 12.60%

Step-by-step explanation:

The pre-tax return is determined by the difference from selling and purchase price, added to received dividends, and then divided by the purchase price:

`R_(PT) = ((117-101)+1.80)/(101)\\R_(PT) =0.1762=17.62\%`

For the after-tax return rate, correspondent dividend and long-term capital gains taxes should be considered:

`R_(AT) = ([(117-101)*(1-0.30)]+[1.80*(1-0.15)])/(101)\\R_(AT) =0.1260=12.60\%`