Question

14) Martin Byrde has $20,000 to invest. He has three potential investment opportunities. One is a stock paying dividends with an expected return of 5.5%, another is a stock gives an expected return of 5% from capital gains and the last is a bond that pays 7% interest. a. Calculate his after tax return from each investment assuming he is in the Top tax bracket (47.7% for interest, 31.3% for dividends and 23.85% for capital gains) Based on this what is the best investment to make? b. Calculate the after tax return from each investment assuming he in the medium tax bracket (31% for interest, 8.25% for dividends and 15.5% for capital gains). Based on this what is the best investment to make? C. Aside from expected return what else should be considered when making investment decisions? I

Answer 1

THINGS WE SHOULD CONSIDER WHILE MAKING INVESTMENT

1. AMOUNT OF RISK INVOLVED

2. GO THROUGH THE FINANCIAL PERFORMANCE OF COMPANY OF PREVIOUS YEARS

3. MAKE A RATIO ANALYSIS OF COMPANIES FINANCIAL FIGURES

4.TIME HORIZON

A..BELOW ANSWER IS BASED ON INVESTMENT FOR AN YEAR PARTICULARS [email protected]%(div) STOCK@5%(capital gain BOND@7%(int) RETURN 1100 1000 1400 (20000*5.5%) (20000*5%) (20000*7%) TAX RATE 31.30% 23.85% 47.70% TAX AMOUNT 344.3 238.5 667.8 (1100*31.3%) (1000*23.85%) (1400*47.7%) NET INCOME 755.7 761.5 732.2 IT IS BETTER TO INVEST IN STOCK @ 5% RETURN B.INVESTMENTS FOR DIFFERENT TAX RATES PARTICULARS [email protected]%(div) STOCK@5%(capital gain BOND@7%(int) RETURN 1100 1000 1400 (20000*5.5%) (20000*5%) (20000*7%) TAX RATE 8.25% 15.50% 31.00% TAX AMOUNT 90.75 155 434 (1100*8.25%) (1000*15.5%) (1400*31%) NET INCOME 1009.25 845 966 ITS BETTER TO INVEST IN STOCK @ 5.5% DIVIDEND NET INCOME DIFFERS BASED ON TAX RATE AND INTEREST RATE HERE, IN FIRST CASE STOCK @ 5% IS BEST BUT IN SECOND CASE IT CHANGED TO STOCK @5.5%.