Question

QUESTION 10 Komiko Tanaka invests $13,000 in LymaBean, Inc. LymaBean does not pay any dividends. Komiko projects that her investment will generate a 11 percent before-tax rate of return. She plans to invest for the long term. How much cash will Komiko retain, after-taxes, if she holds the investment for 6 years and then she sells it when the long-term capital gains rate is 15 percent?

QUESTION 11 Komiko Tanaka invests $13,000 in LymaBean, Inc. LymaBean does not pay any dividends. Komiko projects that her investment will generate a 11 percent before-tax rate of return. She plans to invest for the long term. If she holds the investment for 6 years and then she sells it when the long-term capital gains rate is 15 percent, what is her after-tax rate of return?

Answer 1

Question 10
Calculation of Capital gain and cash retained after tax at the end of 6th year
Particulars	Calculation	Amount
a	Value of Investment after 6 years	= 13000*(1+0.11)^6 =	$ 24,315.39
b	Less : Purchase cost of Investment		$ 13,000.00
c	Long term Capital gain	a-b	$ 11,315.39
d	Tax on Long term Capital Gain at 15%	d x 15%	$   1,697.31
e	Cash Retained after tax	a-d	$ 22,618.08

Question 11
Calculation of after tax rate of return
a	Investment proceeds received after tax	$ 22,618.08
b	Initial Investment Amount		$ 13,000.00
c	So we can say that                                                                     13000*(1+x)^6 = 22618.08
		13000*(1+x^6)= 22618.08
		1+x^6=22618.08/13000
		1+x^6=	1.73985231
		x ^6	0.73985231
		So x	0.12