You Buy a Stock for $30 Per Share and Sell

question 3

Multiple Choice

You buy a stock for $30 per share and sell it for $33 after holding it for slightly over a year and collecting a $0.75 per share dividend. Your ordinary income tax rate is 28% and your capital gains tax rate is 20%. Your after-tax rate of return is ___________________.

• A) 8.00%
• B) 10.25%
• C) 12.50%
• D) 9.80%
• E) 8.75% [((33 - 30)  (1 - 0.20)) + (0.75  (1 - 0.28))]/30 = 2.94/30 = 9.8%

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Definitions:

CAPM

Short for Capital Asset Pricing Model, a financial model that describes the relationship between systematic risk and expected return for assets.

Required Rates of Return

The minimum annual percentage earnings needed from an investment to compensate for its risk, serving as a benchmark for evaluating potential investments.

Standard Deviations

A statistical measure of the dispersion or variability of a set of data points or investment returns from their average value.

Expected Return

The weighted average of the probable returns of an investment, calculated based on past performance or statistical analyses.