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 $44.51 per share. Assume the price goes up to $57.41 per share over the next 12 months and you receive a qualified dividend of $0.51 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 30.13 %. (Round to two decimal places.) Assuming you continue to hold the stock, your after-tax rate of return is %. (Round to two decimal places.)

Answer 1

1)

Total return = (ending price - Purchasing price + dividends) / purchasing price

= (57.41 - 44.51 + 0.51) / 44.51

= 30.13%

2)

tax on dividend = 15%

dividend = 0.51

after tax dividend = 0.51*(1-15%) = 0.4335

Return = (ending price - Purchasing price + after tax dividends) / purchasing price

= (57.41 - 44.51 + 0.4335) / 44.51

= 29.96%

3)

capital gain = 57.41 - 44.51 = 12.9

Tax rate = 15%

after tax capital gain = 12.9*(1 - 0.15) = 10.965

Return = (after tax capital gain + after tax dividends) / purchasing price

= (10.965 + 0.4335) / 44.51

= 25.61%