During 2020, Mr. Hopkins realized a $20,000 long-term capital loss on a sale of ABC Inc....

During 2020, Mr. Hopkins realized a $20,000 long-term capital loss on a sale of ABC Inc. stock. Mr. Hopkins also owns 2,100 shares of XYZ Inc. stock with a basis of $70 per share and a current market value of $90 per share. Mr. Hopkins purchased this stock six months ago. Mr. Hopkins plans to hold his XYZ stock until 2024, at which time he expects to sell the stock for $135 per share. Mr. Hopkins is considering selling just enough of his XYZ shares to fully utilize his capital loss in 2020, and immediately repurchasing the XYZ shares the following day at the same price ($90) so as to maintain his investment in XYZ. He will then sell his XYZ stock, including the original shares acquired for $70 and the repurchased shares acquired for $90, in 2024 as originally planned.

Alternatively, Mr. Hopkins is considering simply holding his XYZ stock until selling it in 2024. Mr. Hopkins’ ordinary income tax rate is 25% and his long-term capital gains tax rate is 15%. He uses a discount rate of 5% in his NPV calculations.

Using the above information, which alternative (i.e., the sale/repurchase strategy or simply holding the stock until 2024) maximizes Mr. Hopkins’ post-tax cash flows from his XYZ stock?

Expert Solution

ekkarill92 answered 2 years ago

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