Which statement is true concerning the one-year after-tax return on the followin

Question

Which statement is true concerning the one-year after-tax return on the following stocks, assuming a 40% tax rate on dividends and a 20% tax rate on capital gains: Stock A is purchased for $50, offers a 5% dividend yield, and is sold for $56; stock B is purchased for $60, offers no dividend yield, but is sold after one year for $70. A. Stock A's after-tax return is higher by 1.27%. B. Stock B's after-tax return is higher by .73%. C. Stock A's after-tax return is higher by .27%. D. Stock B's after-tax return is higher by .58%.

Explanation / Answer

Mode of return Return tax Return after tax Capital gain @20% 6 1.2 4.8 Dividend @40% 2.5 1 1.5 8.5 6.3 Mode of return Return tax Return after tax Capital gain 10 2 8 Dividend 0 0 0 10 8

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