Question

MHE Reader Connect Help Save Saved Homework Alan inherited $100,000 with the stipulation that he "invest it to financially benefit his family." Alan and his wife Alice decided they would invest the inheritance to help them accomplish two financial goals: purchasing a Park City vacation home and saving for their son Cooper's education Vacation Home Cooper's Education Initial investment $50,000 $50,000 Investment horizon 5 years 18 years Alan and Alice have a marginal income tax rate of 32 percent (capital gains rate of 15 percent) and have decided to investigate the following investment opportunities. Complete the two annual after-tax rate of return columns for each investment. (Do not round intermediate calculations. Round your final answers to 2 decimal places.) 5 Years Annual After Tax Rate of Return 18 Years Annual After- Tax Rate of Return 5.75 % % 4.75 % Corporate bonds (ordinary interest taxed annually) Dividend paying stock (no appreciation and dividends are taxed at 15%) % % 3.50% % 3.50 % Growth stock Future value is $65,000 % % Future value is $140,000 Municipal bond (tax-exempt) 3.20 % % % 3.10 % < Prev 10 of 10 Next >

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Answer 1

Requirement:- Compute the two annual after tax rates of return columns for each investment.

Solution:-

5 Years Annual after 18 Years Tax rate of return Annual after Tax rate of return 5.75 % 3.91 % 4.75 % 3.23 % Corporate bonds (ordinary interest taxed annually) Dividend paying stock (no appreciation and dividends are taxed at 15%) 3.5 % 2.975 % 3.5 % 2.975 % Growth Stock Muncipal Bonds Future Value is 65,000 3.2 % 4.65 % 3.2 % Future value is $140,000 3.1 % 5.29 % 3.1 %

Working Note:-

Caclulation of Corporate Bonds for 5 years = 5.75% * (1-32%) = 3.91%

Caclulation of Corporate Bonds for 18 years = 4.75% * (1-32%) = 3.23%

Calculation of dividend paying stock for 5 years = 3.50% * (1 - 15%) = 2.975%

Calculation of dividend paying stock for 18 years = 3.50% * (1 - 15%) = 2.975%

Calculation of Growth stock for 5 years = $65,000 - (15% * ($65,000 - $50,000) = $62,500

                                                              = (62,500 / 50,000)^1/5

                                                              = .04647 or 4.65%

Calculation of Growth stock for 18 years = $140,000 - (15% * ($140,000 - $50,000) = $126,500

                                                                 = (126,500 / 50,000)^1/18

                                                                 = 0.05292 or 5.29%

Calculation of Municipal bonds for both years = Income from muncipal bond is tax exempt.

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