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 0.73%.
C)Stock A's after-tax return is higher by 0.27%.
D)Stock B's after-tax return is higher by 0.58%.

Question

Quizplus · Accepted Answer

Stock A:
- Dividend yield = 5% x $50 = $2.50
- After-tax dividend = $2.50 x (1-40%) = $1.50
- Capital gain = $56 - $50 = $6
- After-tax capital gain = $6 x (1-20%) = $4.80
- Total after-tax return = ($1.50 + $4.80) / $50 = 12.6%
Stock B:
- Capital gain = $70 - $60 = $10
- After-tax capital gain = $10 x (1-20%) = $8
- Total after-tax return = $8 / $60 = 13.3%
Therefore, Stock B's after-tax return is higher by 0.73%.

Which Statement Is True Concerning the One-Year After-Tax Return on the Following