Question

Suppose you are considering putting your savings in an investment fund. Scenario A projects stable prices, and therefore, low returns Scenario B involves high inflation and, consequently, high returns. In both cases, the capital earnings tax rate is 24.0%. Calculate the nominal and real after-tax returns for both scenarios. Please include at least two numbers after the decimal point for your answers. Do not round your answers Scenario Inflation Nominal rate of return 6.00% 18.50% 2.5% In Scenario A, what is the nominal after-tax rate of return? 4.74 In Scenario A, what is the real after-tax rate of return? 2.19 In Scenario B, what is the nominal after-tax rate of return? 14.62 In Scenario B, what is the real after-tax rate of return? 0.33

Answer 1

Nominal after- tax rate in scenario A The capital earning tax rate is 24%. In scenario A: Nominal rate of return is 6%. The nominal rate of return after- tax can be calculated as follows: Nomial rate of return after tax Nominal rate (1-Tax rate) 6(1-0.24) = 4.56% Thus, the nominal rate of return after tax is 14.56% Real after- tax rate in scenario A: in scenario A, inflation rate is 2.5%. The real rate of return after- tax can be calculated as follows: Real rate after tax = Nominal rate after tax-inflation rtae 24.56-2.5 = 2.06% Thus, the real rate of return after tax is 2.06%

Nominal after- tax rate in scenario B: The capital earning tax rate is 24%. In scenario B. Nominal rate of return is 18.50% The nominal rate of return after- tax can be calculated as follows Nomial rate of return aftertax Nominal rate (1-Tax rate) = 18.50(1-0-24) = 14.06% Thus, the nominal rate of return after tax is 1406%) Real after- tax rate in scenario B: In scenario B, inflation rate is 15%. The real rate of return after- tax can be calculated as follows: Real rate after tax Nominal rate after tax-inflation rtae =14-06-15 =-0.94% Thus, the real rate of return after tax is 0.94%