An investor buys stock for $10,000 at the beginning of the year.She earns dividends of $300 during the course of the year.At the end of the year, the stock is worth $10,800.The tax rate on dividends and capital gains is 15 percent. The inflation rate is 3 percent.What is the investor's after tax real return if she sells the stock at the end of the year?

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Quizplus · Accepted Answer

The investor's total return includes both the dividends received and the capital gains from the increase in stock value. The dividends are $300, and the capital gain is $800 ($10,800 - $10,000). The total pre-tax return is $1,100. After applying the 15% tax rate, the after-tax return is $935 ($1,100 - ($1,100 * 0.15)). To find the real return, we adjust for inflation: $935 / (1 + 0.03) = $907.77. The real return on the initial investment of $10,000 is $907.77 / $10,000 = 9.08%. However, to express this as a percentage, we need to adjust for the inflation effect on the initial investment, which reduces its real value. The real after-tax return is calculated as follows: [(After-tax return / Initial investment) - Inflation rate] * 100 = [(935 / 10,000) - 0.03] * 100 = 6.35%.

An Investor Buys Stock for $10,000 at the Beginning of the Year.She