What is the difference in the one-year after-tax returns on the following two stocks,assuming a 40% tax rate on dividends and a 20% tax rate on capital gains? Stock A is purchased for $50,pays a $2.5 dividend at the end of the year,and is then sold for $56; stock B is purchased for $60,pays no dividend,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

R_A = [($2.5 + $56 − $50) − (0.4 × $2.5) − (0.2 × $6)] / $50 = 0.1260, or 12.60%R_B = [($70 − 60) − (0.2 × $10) / $60] = 0.1333, or 13.33%Difference = 13.33% − 12.60 = 0.73%

What Is the Difference in the One-Year After-Tax Returns on the Following