You buy a stock for $30 per share and sell it for $33 after holding it for slightly over a year and collecting a $0.75 per share dividend. Your ordinary income tax rate is 28 percent and your capital gains tax rate is 20 percent. Your after-tax rate of return is ________.

Question

Quizplus · Accepted Answer

The after-tax rate of return can be calculated by considering both the capital gain and the dividend received. The capital gain is $3 per share ($33 - $30), and the dividend is $0.75 per share. The capital gains tax on the $3 gain is 20%, which equals $0.60 ($3 * 20%). The tax on the dividend at the ordinary income tax rate of 28% is $0.21 ($0.75 * 28%). Therefore, the after-tax gain per share is $2.40 ($3 - $0.60) from the sale plus $0.54 ($0.75 - $0.21) from the dividend, totaling $2.94. The initial investment was $30, so the after-tax rate of return is ($2.94 / $30) * 100 = 9.8%.

You Buy a Stock for $30 Per Share and Sell