Alan inherited $100,000 with the stipulation that he \"invest it to financially

Question

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 thein son Cooper's education Vacation Home $ 50,000 Cooper's Education $ 50,000 Initial investment 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 rates of return columns for each investment and provide investment recommendations for Alan and Alice. (Do not round intermediate calculations. Round your final answers to 2 decimal place.) Annual After- Tax Rate of Return Annual After- Tax Rate of Return 5 Years 18 Years Corporate bonds (ordinary interest taxed annually) 5.75 % : 4.75 % Dividend-paying stock (no appreciation and dividends are taxed at 15%) 3.50 % 3.50 % Future Future value is $65,000 Growth stock % | value is $140,000 Municipal bond (tax-exempt) 3.20 % 3.10%

Explanation / Answer

5 Years Annual after tax rate of return 18 Years Annual after tax rate of return Corporate bonds (ordinary interest taxed annually) 5.75% 5.75%*(1-32%) 3.91% 4.75% 4.75%*(1-32%) 3.23% Dividend Paying stock (no appreciation and dividends are taxed at 15%) 3.50% 3.50%*(1-15%) 2.98% 3.50% 3.50%*(1-15%) 2.98% Growth Stock 65000 ((65000/50000)^(1/5)-1)*(1-15%) 4.58% 140000 ((140000/50000)^(1/18)-1)*(1-15%) 5.00% Municipal bond (tax exempt) 3.20% 3.20% 3.20% 3.10% 3.10% 3.10% For a shorter duration target, the investment should be done in bonds - Corporate & Municipal bonds For Longer duration target, the investment should be made in Growth Stock

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