Application 28-32

Question 1

An investor in a 40% tax bracket earns an aftertax

return of 9%. What must be the investor’s pre-tax return?

Answer 1

(1-0.4) = 0.6

0.09 / 0.6
= 0.15

Question 2

An investor in a 40% tax bracket earns an aftertax

return of 7.44%. What must be the investor’s pre-tax return?

Answer 2

(1-0.4) = 0.6

0.0744 / 0.6
= 0.124

Question 3

An investor in a 45% tax bracket earns an aftertax

return of 8.71%. What must be the investor’s pre-tax return?

Answer 3

?

Question 4

An investor in a 38% tax bracket earns an aftertax

return of 11.69%. What must be the investor’s pre-tax return?

Answer 4

?

Question 5

An investor in a 35% tax bracket earns an aftertax

return of 4.04%. What must be the investor’s pre-tax return?

Answer 5

?

Question 6

An investor in a 42% tax bracket earns an aftertax

return of 19.54%. What must be the investor’s pre-tax return?

Answer 6

?

Question 7

An investor in a 43% tax bracket earns an aftertax

return of 15.79%. What must be the investor’s pre-tax return?

Answer 7

?

Question 8

An investor in a 50% tax bracket earns an aftertax

return of 19.95%. What must be the investor’s pre-tax return?

Answer 8

?

Question 9

An investor in a 40% tax bracket on ordinary
income invests in a product that earns a pre-tax return of 10%. Sixty percent of
the income is distributed as a capital gain that is taxed at 40% of the ordinary
income tax rate. What is the investor’s total after-tax return?

Answer 9

tax bracket x income tax rate = taxed capital gains

0.40% x 0.40%
= 0.16%

(1 - 0.16) x 0.6 (pre-tax return proportion of capital gains)

= 0.504 x 0.1 (pre-tax return)

= 0.0504

(1 - 0.6) x 0.1

= 0.04

1 - 0.4

= 0.6

0.04 x 0.60 + 0.0504

= 0.0744

Question 10

An investor in a 40% tax bracket on ordinary
income invests in a product that earns a pre-tax return of 12%. Sixty-five percent of
the income is distributed as a capital gain that is taxed at 45% of the ordinary
income tax rate. What is the investor’s total after-tax return?

Answer 10

?

Question 11

An investor in a 40% tax bracket on ordinary
income invests in a product that earns a pre-tax return of 15%. Seventy percent of
the income is distributed as a capital gain that is taxed at 38% of the ordinary
income tax rate. What is the investor’s total after-tax return?

Answer 11

?

Question 12

An investor in a 40% tax bracket on ordinary
income invests in a product that earns a pre-tax return of 5%. Seventy-five percent of
the income is distributed as a capital gain that is taxed at 35% of the ordinary
income tax rate. What is the investor’s total after-tax return?

Answer 12

?

Question 13

An investor in a 40% tax bracket on ordinary
income invests in a product that earns a pre-tax return of 25%. Eighty percent of
the income is distributed as a capital gain that is taxed at 42% of the ordinary
income tax rate. What is the investor’s total after-tax return?

Answer 13

?

Question 14

An investor in a 40% tax bracket on ordinary
income invests in a product that earns a pre-tax return of 20%. Eighty-five percent of
the income is distributed as a capital gain that is taxed at 43% of the ordinary
income tax rate. What is the investor’s total after-tax return?

Answer 14

?

Question 15

An investor in a 40% tax bracket on ordinary
income invests in a product that earns a pre-tax return of 30%. Fifty-five percent of
the income is distributed as a capital gain that is taxed at 50% of the ordinary
income tax rate. What is the investor’s total after-tax return?

Answer 15

?