Question

Problem 7-39 (LO 7-1) Hayley recently invested $43,000 in a public utility stock paying a 3 percent annual dividend. (Hayley's marginal income tax rate is 32 percent and preferential tax rate is 15 percent.) Use Tax Rate Schedule, Dividends and Capital Gains Tax Rates for reference. Required: a. If Hayley reinvests the annual dividend she receives net of any taxes owed on the dividend, how much will her investment be worth in six years if the dividends paid are qualified dividends? b. What will her investment be worth in six years if the dividends are nonqualified? (For all requirements, do not round intermediate calculations and round your final answers to the nearest whole dollar amount.) a. Investment worth when dividends are qualified Investment worth when dividends are nonqualified b.

Answer 1

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Solution: Answer is highlighted in yellow: Tax rate on Qualified dividend is 15% for individual with 32% marginal rate: Calculation: (Beg Bal *3%)*68% (43000*3%)*68% Calculation: (Beg Bal *3%)*85% Year 1 return reinvested (43000*3%)*85% Balance Year 2 return reinvested Balance Year 3 return reinvested Balance Year 4 return reinvested Balance Year 5 return reinvested Balance Year 6 return reinvested a) Investment worth in 6 years when dividends are qualified b) Investment worth in 6 years when dividends are nonqualified Amount $ 43,000 $ 1,097 $ 44,097 $ 1,124 $ 45,221 $ 1,153 $ 46,374 $ 1,183 $ 47,557 $ 1,213 $ 48,769 $ 1,244 $ 50,013 Amount $ 43,000 $ 877 $ 43,877 $ 895 $ 44,772 $ 913 $ 45,686 $ 932 $ 46,618 $ 951 $ 47,569 $ 970 $ 48,539