Question

Jill Clark invested $ 25,000 in the bonds of Industrial​ Aromatics, Inc. She held them for 13​ months, at the end of which she sold them for 26,744. During the period of ownership she received $1,965 interest. Calculate the pretax and​ after-tax HPR on​ Jill's investment. Assume that she is in the 31%ordinary tax bracket​ (federal and state​ combined) and pays a 15%capital gains rate on dividends and on capital gains for holding periods longer than 12 months.

The​ pre-tax HPR is (blank) % ?

The​ after-tax HPR is (blank) %?

Answer 1

Answer:

Given,

Investment in bonds = $25,000

Selling price of the bond = $26,744

Interest received = $1,965

Ordinary tax bracket = 31%

Capital gain on dividends = 15%

The capital gain is calculated first to find out the value of Pretax HPR.

calculation of capital gain realized on sale of stock :

Capital gain = Ending investment value - Beginning investment value

= $26,744-$25,000

= $1,744

Capital gain = $1,744.

Calculation of pretax HPR :

Holding period return = (Current income + Capital gain)/Beginning investment value

=($1,965 +$ 1,744)/25,000

=0.14836

pretax holding period return = 14.836%

Calculation of after tax HPR:

Interest	$1,965
After tax [(1-0.31) x 1,965]	$1,356
Capital gain	1,744
After tax [(1-0.15) x $1,744]	$1,482
After tax income [$1,356+$1,482]	$2,838

After tax holding period return = After tax income/Beginning investment value

=$2,838 / $25,000

=0.11352

After tax holding period return = 11.352%