Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Jason and Kerri Consalvo, both in their 50's, have
capital gains. The Consalvos do not expect the value of this stock to increase. The other investment under consideration is a highly rated corporate bond that currently sells for
$47,000
to invest and plan to retire in 10 years. They are considering two investments. The first is a utility company common stock that costs
$47
per share and pays dividends of
$2.35
per share per year (a
5%
dividend yield). Note that these dividends will be taxed at the same rates that apply to long-term $1,000
and pays annual interest at a rate of
6.0%,
or
$60.00
per
$1,000
invested. After 10 years, these bonds will be repaid at par, or
$1,000
per
$1,000
invested. Assume that the Consalvos keep the income from their investments but do not reinvest it (they keep the cash in a non-interest-bearing bank account). They will, however, need to pay income taxes on their investment income. If they buy the stock, they will sell it after 10 years. If they buy the bonds, in 10 years they will get back the amount they invested. The Consalvos are in the
32%
tax bracket.
(Note:
The tax rate on dividends for the Consalvos will be 15% and your calculations should ignore the 3.8% tax on investment income that was part of the Affordable Care Act.)a. How many shares of the stock can the Consalvos buy?
b. How much will they receive after taxes each year in dividend income if they buy the stock?
c. What is the total amount they would have from their original
$47,000
if they purchased the stock and all went as planned?d. How much will they receive after taxes each year in interest if they purchase the bonds?
e. What is the total amount they would have from their original
$47,000
if they purchased the bonds and all went as planned?f. Based only on your calculations and ignoring other risk factors, should they buy the stock or the bonds?
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