# 1. A taxpayer can invest \$5,000 in a common stock that pays no dividends but appreciates at a…

1. A taxpayer can invest \$5,000 in a common stock that pays no dividends but appreciates at a rate of 8%. The taxpayer’s tax rate is 30%. He plans to sell the stock after 30 years. a. Find the after-tax accumulation and the annualized after-tax rate of return for this investment. b. What would have been the annualized after-tax rate of return on the stock if there were a special tax rate of 20% on capital gains? (Exercise adapted from problem written by Richard Sansing, Dartmouth College.) 2. A corporation can invest \$10,000 in preferred stock that pays a 6% dividend and does not appreciate in price. The corporation faces a 40% tax rate. Dividends from the stock are eligible for the 70% corporate dividends received deduction. That is, the corporation has to include only 30% of the dividend in its taxable income. This results in an effective tax rate on the dividend of 12% (= .30 × .40). Assume dividend income is reinvested in more 6% preferred stock. a. Find the after-tax accumulation for this investment after 10 years. b. Find the annualized after-tax rate of return on this investment after 10 years. (Exercise adapted from problem written by Richard Sansing, Dartmouth College.)

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