Mary is deciding where to invest $10,000.Based on her decision,she will either receive a 5% capital gain or a 7% non-eligible dividend as her return on investment.Mary's marginal tax rates are: 45% on regular income,35% on non-eligible dividends,28% on eligible dividends,and 23% (rounded)on capital gains.Which of the following is correct?

Question

Quizplus · Accepted Answer

To determine the after-tax rate of return for each investment, we need to calculate the tax payable on each return and deduct it from the original return.

For the capital gain, the tax payable is 23% of the gain (since Mary's marginal tax rate for capital gains is 23%). Therefore, the after-tax rate of return for the capital gain is:

5% x (1 - 0.23) = 3.85%

For the non-eligible dividend, the tax payable is 35% of the dividend (since Mary's marginal tax rate for non-eligible dividends is 35%). Therefore, the after-tax rate of return for the non-eligible dividend is:

7% x (1 - 0.35) = 4.55%

Since the after-tax rate of return for the non-eligible dividend is higher than that for the capital gain, Mary should choose to invest in the non-eligible dividend for a higher return. Therefore, the best choice is:

C) Mary will receive an after-tax rate of return of 3.85% on the capital gain and 4.55% on the non-eligible dividends.

Mary Is Deciding Where to Invest $10,000