Question

An investor’s portfolio currently is worth $1 million. During the year, the investor sells 500 shares of FedEx at a price of $180 per share and 3,000 shares of Cisco at a price of $30 per share. The proceeds are used to buy 1,000 shares of IBM at $160 per share.

a. What is the portfolio turnover rate?

b. If the shares in FedEx originally were purchased for $140 each and those in Cisco were purchased for $20, and the investor’s tax rate on capital gains income is 20%, how much extra will the investor owe on this year’s taxes as a result of these transactions?

Answer 1

ANS.

Beginning Balance of portfolio = $1,000,000

During the year Total value of share Sell = ($180 × 500) + ($30 × 3,000)

                                                                 = $90,000 + $90,000

                                                                 = $180,000

During the year Total value of share Sell is $180,000

Again

During the year Total value of share purchase = $160 × 500

                                                                          = $80,000

So ending value of Portfolio = $1,000,000 - $180,000 + $180,000

                                             = $1,000,000

Ending value of portfolio is $1,000,000

Total sale of securities = total purchase value of securities.

So portfolio turnover = 100%

Again

Purchase price of FedEx share = $140

Purchase price of Cisco share = $20

Total profit from sell = $165,000 – (140 × 1000) - ($20 × 3,000)

                                 = $165,000 - $140,000 - $60000

                                 = $165,000 - $80,000

                                 = $85,000

Total Profit from sell of share is $85000

Capital gain tax rate = 20%

Total tax paid = $85000 × 20%

                       = $17000

Total tax paid is $17000

So to purchase Share of IBM an investor has to owes is $17000

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