Question

22. George Hunn holds a stock which is worth $60.00 a share. During his investment period, he received $3.10 in dividends. At the end of the year he sold the stock for $51.00. If dividend income is taxed at 30.00% and capital gains are taxed at 25.00%, what is his after-tax holding period return for his investment in a given year? 9.10% -9.77% 10.50% -11.38%

Answer 1

There is no capital gain, so no capital gain tax would be charged. However, tax on income, that is, on dividend is applicable.

After-tax holding return is calculated below:

60 X (1+i) = 3.10 x (1 – 0.30) + 51

60 X (1+i) = 2.17 +51

60 X (1+i)= 53.17

(1 + i)= 0.8862

i= -0.1138

Thus, the correct option is d, that is, -11.38%.