Question

Donna purchased stock valued at $10,000 in 2000. In 2005, she sold the stock for 11,500.

Donna's capital gain, for tax purposes is $________, which is a ________% gain on her investment.

Over the period during which Donna owned her stock, asset prices rose by 6% due to inflation. Thus, Donna's real capital gain is ________%, or $________.

Answer 1

$1,500; 15%

8.49%; $849

Step-by-step explanation:

Her original capital gain, excluding inflation is:

`C=11,500-10,000\\C=\$1,500\\\\r=(11,500)/(10,000)-1=0.15\\ r=15\%`

Donna's capital gain, for tax purposes is $1,500, which is a 15% gain on her investment.

Let 'i' be the rate of inflation of 6%. The adjusted capital gain is given by:

`r_A = (1+r)/(1+i)-1=(1+0.15)/(1+0.06)-1\\ r_A=0.0849=8.49\%\\\\C_A=0.0849*10,000\\C_A=\$849`

Donna's real capital gain is 8.49%, or $849.