Bernie and Pam Britten are a young married couple beginningcareers and establish

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Bernie and Pam Britten are a young married couple beginningcareers and establishing a household. They will each make about$50,000 next year and will have accumulated about $40,000 toinvest. They now rent an apartment but are considering purchasing acondominium for $100,000. If they do, a down payment of $10,000will be required.
They have discussed their situation with Lew McCarthy, aninvestment advisor and personal friend, and he has recommended thefollowing investments:
The condominium - expected annual increase in market value =2%. Municipal bonds - expected annual yield = 3%. High-yield corporate stocks - expected dividend yield =5%. Savings account in a commercial bank-expected annual yield =1%. High-growth common stocks - expected annual increase in marketvalue = 6%; expected dividend yield = 0.
Calculate the after-tax yields on the foregoing investments,assuming the Brittens have a 28% marginal tax rate (based on PublicLaw 108-27, The Jobs and Growth Tax Relief Reconciliation Act of2003). How would you recommend the Brittens invest their $40,000?Explain your answer. Bernie and Pam Britten are a young married couple beginningcareers and establishing a household. They will each make about$50,000 next year and will have accumulated about $40,000 toinvest. They now rent an apartment but are considering purchasing acondominium for $100,000. If they do, a down payment of $10,000will be required.
They have discussed their situation with Lew McCarthy, aninvestment advisor and personal friend, and he has recommended thefollowing investments:
The condominium - expected annual increase in market value =2%. Municipal bonds - expected annual yield = 3%. High-yield corporate stocks - expected dividend yield =5%. Savings account in a commercial bank-expected annual yield =1%. High-growth common stocks - expected annual increase in marketvalue = 6%; expected dividend yield = 0.
Calculate the after-tax yields on the foregoing investments,assuming the Brittens have a 28% marginal tax rate (based on PublicLaw 108-27, The Jobs and Growth Tax Relief Reconciliation Act of2003). How would you recommend the Brittens invest their $40,000?Explain your answer.

Explanation / Answer

Calculate the after-tax yields on the foregoing investments,assuming the Brittens have a 28% marginal tax rate (based on PublicLaw 108-27, The Jobs and Growth Tax Relief Reconciliation Act of2003).

Public Law 108-27 Jobs and Growth Tax Relief Reconciliation Actof 2003 - http://en.wikisource.org/wiki/US_Public_Law_108-27

The condominium - expected annual increase in market value = 5%.- assuming the property will be used as a primary residence thegain generally will not be taxed.
Municipal bonds - expected annual yield = 5%. - tax exempt on thefederal level
High-yield corporate stocks - expected dividend yield = 8%. -qualified dividends will be taxed at 15% rate - after tax yield =.08*(1-.15)=6.8%
Savings account in a commercial bank-expected annual yield = 3%. -will be taxed at regular rate 28% - after tax yield =.03*(1-.28)=2.16%
High-growth common stocks - expected annual increase in marketvalue = 10%; expected dividend yield = 0. - assuming stocks will beheld more than a year - that will be long term capital gain taxedat 15% rate - after tax yield = .1*(1-.15)=8.5%

How would you recommend the Brittens invest their $40,000?Explain your answer.

Purchase a the condominium would be the first step - that is notonly investment option, but also additional taxsavings on mortgage interest, real estate taxes, andthey do not need to pay rent expenses.

High-growth common stocks seems as the best XXXXXX, XXX that isthe most risky one and less liquid - they should allocate only thatpart of funds to accommodate risk factors and long term investment.However the tax liability would be delayed as they would owe taxedonly if stock are sold.

Municipal bonds is a good option because the earnings are nottaxable that is very important because of high tax bracket. It isalso less risky option.

Funds in savings account should be viewed more as security fundsand less as investment. That is very liquid option in case ofemergency.

So recommendations would be:
1.$10,000 down payment for condominium
2.$5000 - savings account as emergency funds
3. the rest should be allocated between High-yield corporatestocks, High-growth common stocks, and Municipal bonds based oninvestment objectives and risk factors.

Source:http://www.justanswer.com/questions/19koe--and-pam-britten-are-a-young-married-couple-beginning

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