After reading this chapter, it isn\'t surprising that you\'re becoming an invest

Question

After reading this chapter, it isn't surprising that you're becoming an investment wizard. With your newfound expertise you purchase 100 shares of KSU Corporation for $25.53 per share. Over the next 12 months assume the price goes up to $32.82 per share, and you receive a qualified dividend of $0.65 per share. What would be your total return on your KSU Corporation investment? Assuming you continue to hold the stock, calculate your after-tax return. How is your realized after-tax return different if you sell the stock? In both cases assume you are in the 25 percent federal marginal tax bracket and 15 percent long-term capital gains and qualified dividends tax bracket and there is no state income tax on investment income Your total rate of return on your KSU Corporation investment is 31.10 %. (Round to two decimal places.) Assuming you continue to hold the stock, your after-tax rate of return is 9 Round to two decimal places.

Explanation / Answer

Solution:

1. Rate of return = (Ending value - Beginning value + Dividend)/Beginning value

Rate of return = ($32.82 - $25.53 + $0.65)/$25.53

Rate of return = 31.10%

2. After-tax return = Rate of return x (1 - tax rate)

After-tax return = 28.71%

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