4. Investing ou can earn a 7% return on an investment (ROI) in a taxable account

Question

4. Investing ou can earn a 7% return on an investment (ROI) in a taxable account. Alternatively, you can earn a 5.5% return on an investment (ROI) that is tax-free. If You're in the 25% tax bracket, what is your after-tax return on each investment · Y 7% taxable: After-tax ROI is-at- 5.5% tax-free. After-tax ROI is 55 ents is more desirable? ecalculate the above information assuming that you are in the 15% tax bracket. What is your after-tax return on each investment? aas-- 7% taxable: After-tax ROI is 5.5% tax-free. After-tax ROI is Which of the above investments is more desirable? Do you see how your tax bracket can affect your investment decisions? You are 25 years old and wish to allocate your portfolio the following way: . . . Asset Class Percentage of Portfolio 25% Corporate stock-Small Co. Corporate stock-Large Co.(Dzn, sptSA 50% Bonds (Corporate & Municipal) What is your Expected Annual ROl for this portfolio? 25% Asset Class Expected Annual ROl Percentage of Fortfolio Cxoected Value 10% Corporate Stock-Small Co. Corporate Stock - Large Co. Bonds 8% 5% Expected Annual ROI Rule of 72: Take the number 72 and divide it by your average annual ROI. The result is the number of years it takes to double your money. Problem #1: If your average annual ROI is 8%, how many years will it take to double your money? years. Solution: roblem #2: If your investment period is 45 years, how many times will your money double during this period?-times. Solution: #3: Based on the information above, if you invest $10,000, how Problem much will you accumulate at the end of 45 years? Solution: vear0 $ 10,000 1. year 2. year 3. year$ 4. year 5. year$

Explanation / Answer

4… 25% Tax rate Investment After-tax return 7% Taxable 7%*(1-25%)= 5.25% 5.5% tax -free 5.50% Desirable of the two --- Tax-free investment which returns more 15% Tax rate Investment After-tax return 7% Taxable 7%*(1-15%)= 5.95% 5.5% tax -free 5.50% Desirable of the two --- 7% Taxable investment which returns more Yes.Tax bracket affects investment decisions Asset class Expected Annual ROI % age of Portfolio Expected Value Corp.stock-Small Co. 10% 25% 2.50% Corp.stock-Big Co. 8% 50% 4.00% Bonds 5% 25% 1.25% Expected Annual ROI for this portfolio 7.75% 1. If average annual ROI is 8% No.of yrs. To double the money=72/8= 9 yrs. 2.. In 45 years, the money will double 45/9=5 times 3.. At the end of 45 yrs. 10000*2*5= 100000

Related Questions

Navigate

• Browse (All)
• Browse 4
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.