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 $37 per share. Assume the price goes up to $45 per share over the next 12 months and you receive a qualified dividend of $0.50 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.

Answer 1

Number of shares=   100
Purchase price=   37
Closing price after 1 year=   45
Qulaified Dividend=   0.5
a  
Total Return = ((Closing price - purchase price)+Qualified Dividends)*Number of Shares  
((45-37)+0.50)*100  
$850.00  
Total Return is   $850.00
b. if you do not sale the stock, tax shall be payable only on qualified Dividends at long term income tax rate of 15%  
After-tax qulaified Dividends = 0.50*(1-15%)=   0.425
Total Return = ((Closing price - purchase price)+ after-tax Qualified Dividends)*Number of Shares  
((45-37)+0.425)*100  
842.5  
after-tax Return is   842.5
c.   
If you sale the tax, there will be Capital gain = 45-37= 8. capital gain will be long term as stock is held for one year. So capital gain tax @15% will be payable on gain  
After-tax gain = 8*(1-15%)=   6.8
  
So total Return realized = (After-tax Capital gain + After-tax qulaified Dividends)*Number of shares  
(6.8+0.425)*100  
722.5  
So aftertax realized Return is   722.5