Question

Jason and Kerri​ Consalvo, both in their​ 50's, have $44,000 to invest and plan to retire in 10 years. They are considering two investments. The first is a utility company common stock that costs​$44 per share and pays dividends of $1.76 per share per year​ (a 4% dividend​ yield). Note that these dividends will be taxed at the same rates that apply to​ long-term capital gains. The Consalvos do not expect the value of this stock to increase. The other investment under consideration is a highly rated corporate bond that currently sells for$1,000 and pays annual interest at a rate of 5.0%, or ​$50.00 per $1,000 invested. After 10​ years, these bonds will be repaid at​ par, or $1,000 per $1,000 invested. Assume that the Consalvos keep the income from their investments but do not reinvest it​ (they keep the cash in a​ non-interest-bearing bank​ account). They​ will, however, need to pay income taxes on their investment income. If they buy the​ stock, they will sell it after 10 years. If they buy the​ bonds, in 10 years they will get back the amount they invested. The Consalvos are in the 33% tax bracket.

a. How many shares of the stock can the Consalvos​ buy?

b. How much will they receive after taxes each year in dividend income if they buy the​ stock?

c. What is the total amount they would have from their original ​$44,000 if they purchased the stock and all went as​ planned?

d. How much will they receive after taxes each year in interest if they purchase the​ bonds?

e. What is the total amount they would have from their original $44,000 if they purchased the bonds and all went as​ planned?

f. Based only on your calculations and ignoring other risk​ factors, should they buy the stock or the​ bonds?

Answer 1

Solution:-

A. To Calculate how many shares of the stock can the Consalvos​ buy -

Money to Invest = $44,000

Price of the stock = $44

Number of share =

Number of share =

Number of share = 1,000 shares

B. To Calculate How much will they receive after taxes each year in dividend income if they buy the​ stock-

Dividend Amount = Number of share * Dividend per share

Dividend Amount = 1,000 share * 1.76

Dividend Amount = $1,760

After Tax Dividend Amount = $1,760 ( 1 - 0.15 )

After Tax Dividend Amount = $1,496

C. What is the total amount they would have from their original ​$44,000 if they purchased the stock and all went as​ planned-

Number of share = 1,000

Price per stock = $44

Dividend Income = 1,496

Number of year = 10

Total Amount = 1,000 * $44 + 1,496 * 10

Total Amount = $44,000 + $14,960

Total Amount = $58,960.

D.  How much will they receive after taxes each year in interest if they purchase the​ bonds-

Annual Interest = $44,000 * 0.05 = $2,200

After Tax Annual Interest = $2,200 * (1-0.33)

After Tax Annual Interest = $1,474.

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