Question

After reading this chapter, it isn't surprising that you're becoming an investment wizard. With your newfound expertise you purchase 100 shares of KSU Corporation for $42.39 per share. Over the next 12 months assume the price goes up to $51.55 per share, and you receive a qualified dividend of $0.54 per share. What would be your total return on your KSU Corporation investment? Assuming you continue to hold the stock, calculate your after-tax return. How is your realized after-tax return different if you sell the stock? In both cases assume you are in the 25 percent federal marginal tax bracket and 15 percent long-term capital gains and qualified dividends tax bracket and there is no state income tax on investment income.

Answer 1

1. If the stock is not sold and only Dividend income is received. This is Qualified Dividend and hence shall be taxed at 15%.

Dividend income = $0.54 * 100 = $54. This shall be taxed @15%. Hence after tax return shall be $45.9.

2. If the stock is sold and Dividend income is received. Both these components shall be taxed at 15% since the share has been held for one year, qualifying as Long term

Particulars	Amount ($)	Calculation
Invt price…...(i)	4239	100*42.39
Price after 1 year…...(ii)	5155	100*51.55
Dividend	54	100*0.54
Capital gain	916	(ii)-(i)
Gain	970
Tax @15%	-145.50
Return post tax…...(iii)	824.50	(iii)/(i)
Return post tax (%)	19.45%