Asked by Linda MyPhuong on Jul 11, 2024
Verified
A bond portfolio and a stock portfolio both provided an unrealized pretax return of 8% to a taxable investor. If the stocks paid no dividends, we know that the ________.
A) after-tax return of the stock portfolio was higher than the after-tax return of the bond portfolio
B) after-tax return of the bond portfolio was higher than the after-tax return of the stock portfolio
C) after-tax income of the stock portfolio was equal to the after-tax income of the bond portfolio
D) after-tax income of the stock portfolio could have been higher or lower than the after-tax income of the bond portfolio, depending on the marginal tax rate of the investor
Pretax Return
The financial return on an investment before any taxes are deducted.
Taxable Investor
An individual or entity that is subject to taxes on investment income and capital gains, affecting investment choices and strategies to minimize tax liabilities.
After-tax Return
The profit realized from an investment after all applicable taxes have been subtracted, representing the actual benefit to the investor.
- Compute the actual net rates of return on various investment choices, accounting for taxes.
- Assess investment options considering their associated tax advantages or obligations.
Verified Answer
NV
Nency ViraniJul 14, 2024
Final Answer :
A
Explanation :
The after-tax return of the stock portfolio was higher than that of the bond portfolio because the stocks paid no dividends, meaning their return was likely in the form of capital gains. Capital gains are often taxed at a lower rate than the interest income from bonds, resulting in a higher after-tax return for the stock portfolio.
Learning Objectives
- Compute the actual net rates of return on various investment choices, accounting for taxes.
- Assess investment options considering their associated tax advantages or obligations.