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

question 96

Multiple Choice

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%.

---

Definitions:

Profit-Maximizing Result

The outcome in which a firm achieves the highest possible profit given its constraints and market conditions.

Overhead Allocation

The process of distributing indirect costs to different products, services, projects, or departments within a company.

Direct Labor Hour

The amount of time spent by workers in producing a product or service.

Machine Hour

A unit of measure representing the operation of a machine for one hour, often used in cost accounting to allocate expenses.