How Much Tax Can Charles Save If He Holds Stock

question 38

Multiple Choice

How much tax can Charles save if he holds stock on which he has a $30,000 short-term gain until he can use the applicable 15 percent long-term capital gains tax rate? He is in the 25 marginal tax rate for individuals.

• A)$6,000
• B)$4,500
• C)$3,000
• D)$2,250

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Definitions:

Constant Growth DCF Model

A method of valuing a company using the theory that its stock is worth the sum of all its future cash flows, discounted back to their present value at a constant growth rate.

Perpetual Preferred Stock

A type of preferred stock with no fixed maturity date, where dividends must be paid by the company before dividends are paid to common stockholders.

Expected Return

The weighted average of all possible returns for an investment, with weights representing the probabilities of each outcome.

Required Return

The minimum gain investors expect from an investment, considering its risk level; synonymous with required rate of return.