Question

Komiko Tanaka invests $23,500 in LymaBean, Inc. LymaBean does not pay any dividends. Komiko projects that her investment will generate a 10 percent before-tax rate of return. She plans to invest for the long term.

a. How much cash will Komiko retain, after-taxes, if she holds the investment for 5 years and then she sells it when the long-term capital gains rate is 15 percent? (Do not round intermediate calculations. Round your final answer to the nearest whole dollar amount.)

Cash retained ( )

b. What is Komiko’s after-tax rate of return on her investment in part (a)? (Do not round intermediate calculations. Round your percentage answer to 2 decimal places.)

After-tax rate of return ( )

c. How much cash will Komiko retain, after-taxes, if she holds the investment for 5 years and then sells when the long-term capital gains rate is 25 percent? (Do not round intermediate calculations. Round your final answer to the nearest whole dollar amount.)

Cash retained ( )

d. What is Komiko’s after-tax rate of return on her investment in part (c)? (Do not round intermediate calculations. Round your percentage answer to 2 decimal places.)

After-tax rate of return ( )

e. How much cash will Komiko retain, after taxes, if she holds the investment for 15 years and then she sells when the long-term capital gains rate is 15 percent? (Do not round intermediate calculations. Round your final answer to the nearest whole dollar amount.)

f. What is Komiko’s after-tax rate of return on her investment in part (e)? (Do not round intermediate calculations. Round your percentage answer to 2 decimal places.)

After-tax rate of return ( )

Answer 1

(A)
	$23500 x (1.10)^5	37,847	Amount Received
		-23,500	Basis in stock
		14,347	Long term capital gain
		x 15%	Tax
		2,152	Tax on capital gain
	$37,847-$2,152	35,695	Cash Retained
(B)	[(35,695/23,500)^(1/5)]-1	8.72%
(c)	$23500 x (1.10)^5	37,847	Amount Received
		-23,500	Basis in stock
		14,347	Long term capital gain
		x 25%	Tax
		3,587	Tax on capital gain
	$37,847-$3,587	34,260	Cash Retained
(D)	[(34,260/23,500)^(1/5)]-1	7.83%
(E)
	$23500 x (1.10)^15	98,165	Amount Received
		-23,500	Basis in stock
		74,665	Long term capital gain
		x 15%	Tax
		11,200	Tax on capital gain
	$98,165-$11,200	86,966	Cash Retained
(F)
	[(86,966/23,500)^(1/15)]-1	9.12%