Susan Brown has decided that she would like to go back to school after her kids

Question

Susan Brown has decided that she would like to go back to school after her kids leave home in five years. To save for her education, Susan would like to invest $24,000 in an investment that provides a high return. If her marginal tax rate is 40 percent, what is Susan's after-tax rate of return for the following investment options? Qualified dividends are taxed at 15 percent.

(1) Corporate bond issued at face value with 14 percent stated interest rate payable annually
(2) Dividend-paying stock with an annual qualifying dividend equal to 7% of her investment
(3) Growth stock with an annual growth rate of 7.8 percent and no dividends paid. (Do not round intermediate computations.)

Explanation / Answer

After Tax Rate of Retun can be calculated as under 1 Corporate Bond of 14% = 14*0.60 8.4 8.40% 2 Dividend paying Stock paying 7% Div = 7*0.85 5.95% 3 Growth Stock with Annual Growth rate of 7.8% with No dividend paid = it will be charged at 40% tax on gain on sales of investment

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