Question

Komiko Tanaka invests $22,500 in LymaBean, Inc. LymaBean does not pay any dividends. Komiko projects that her investment will generate a 10 percent before-tax rate of return. She plans to invest for the long term. a. How much cash will Komiko retain, after-taxes, if she holds the investment for 5 years and then she sells it when the long-term capital gains rate is 15 percent? (Do not round intermediate calculations. Round your final answer to the nearest whole dollar amount.) Cash retained b. What is Komiko's after-tax rate of return on her investment in part (a)? (Do not round intermediate calculations. Round your percentage answer to 2 decimal places.) After-tax rate of return %

Answer 1

a)	a	After 5 years she will receive from an investment					$       36,236
		=22500*(1+0.10)^5
	b	Less: Investment					$       22,500
	c	Capital Gain					$       13,736
	d	Tax On Capital Gain (15%*c)					$         2,060
	e	Cash Retained (a-d)					$       34,176
b)		After-tax rate of return
		=($34176/22500)^1/5   -1
		=8.72%
c)	a	After 5 years she will receive from an investment					$       36,236
		=22500*(1+0.10)^5
	b	Less: Investment					$       22,500
	c	Capital Gain					$       13,736
	d	Tax On Capital Gain (25%*c)					$         3,434
	e	Cash Retained (a-d)					$ 32,802.36
d)		After-tax rate of return
		=($32802/22500)^1/5   -1
		7.83%
e)	a	After 15 years she will receive from an investment					$       93,988
		=22500*(1+0.10)^15
	b	Less: Investment					$       22,500
	c	Capital Gain					$       71,488
	d	Tax On Capital Gain (15%*c)					$       10,723
	e	Cash Retained (a-d)					$ 83,264.87
f)
	After-tax rate of return
	=($83265/22500)^1/15   -1
	=9.12%
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