After reading this chapter, it isn\'t surprising that you\'re becoming an invest

Question

After reading this chapter, it isn't surprising that you're becoming an investment wizard. With your newfound expertise you purchase 100 shares of KSU Corporation for $51.02 per share. Over the next 12 months assume the price goes up to $ 61.21 per share, and you receive a qualified dividend of $0.47 per share. What would be your total return on your KSU Corporation investment? Assuming you continue to hold the stock, calculate your after-tax return. How is your realized after-tax return different if you sell the stock? In both cases assume you are in the 25 percent federal marginal tax bracket and 15 percent long-term capital gains and qualified dividends tax bracket and there is no state income tax on investment income.

Question 1 -Your total rate of return on your KSU Corporation investment is_____%. (Round to two decimal places.)

Question 2 - Assuming you continue to hold the stock, your after-tax rate of return is ____%. (Round to two decimal places.)

Explanation / Answer

1) Stock Price Gain=61.21-51.02=$ 10.19

Dividend = $ 0.47

Total Gain = 10.19 + 0.47= $ 10.66

Total Rate of Return= 10.66 /51.02=0.2089= 20.89%

2) There will be no taxes as I am not selling the share and realizing a profit. There are no taxes on unrealized profit. I will only need to pay taxes on the dividend I received.

Stock Price Gain=61.21-51.02=$ 10.19

After tax Dividend = $ 0.47 (1-0.15)= 0.3995

Total Gain = 10.19 + 0.3995= $ 10.5895

Total After Tax Rate of Return=10.5895/51.02=0.2075= 20.75%.

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