Problem 2-10 Taxes and Returns (LO1, CFA9) You purchased a stock at the end of t

Question

Problem 2-10 Taxes and Returns (LO1, CFA9) You purchased a stock at the end of the prior year at a price of $83. At the end of this year, the stock pays a dividend of $2.00 and you sell the stock for $95. 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? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Pretax return 16 871 % After-tax return

Explanation / Answer

Answer:

Pretax Return = (Selling Price – Purchase Price + Dividend per year) / Purchase Price * 100
Pretax Return = (95 – 83 + 2) / 83 * 100
Pretax Return = 14 / 83 * 100
Pretax Return = 16.87%

After Tax Return = (After Tax Capital Gain + After Tax Dividend) / Purchase Price * 100
After Tax Dividend = Dividend * (1 – Tax Rate)
After Tax Dividend = $2.00 (1 – 0.15)
After Tax Dividend = $1.70

After Tax Capital Gain = (Selling Price – Purchase Price) * (1 – Tax Rate)
After Tax Capital Gain = (95 – 83) * (1 – 0.30)
After Tax Capital Gain = $8.40

After Tax Return = (8.40 + 1.70) / 83 * 100
After Tax Return = 12.17%

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