Helen holds 1,000 shares of Fizbo Incorporated stock that she purchased 11 months ago. The stock has done very well and hasappreciated $20/share since Helen bought the stock. When sold, the stock will be taxed at capital gains rates (the long-term rate is 15percent and the short-term rate is the taxpayer's marginal tax rate). Ignore the time value of money.a. If Helen's marginal tax rate is 35 percent, how much would she save by holding the stock an additional month before selling?Tax savingsb. What might prevent Helen from waiting to sell?Helen bearsif she holds the stock for an additional month.The stock price couldsubstantially if there is market volatility or if the company encounters financial difficulties.In addition, Helen may be selling the stockfor which she may be unwilling to wait.

ngs ght prevent Helen from waiting to sell? if she holds the stock for an additional month. rice could substantially if there is market volatility or if the company Helen may be selling the stock for which she

ngs ght prevent Helen from waiting to sell? if she holds the stock for an additional month. rice could substantially if there is market volatility or if the company Helen may be selling the stock for which she

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

100%

Helen holds 1,000 shares of Fizbo Incorporated stock that she purchased 11 months ago. The stock has done very well and has
appreciated $20/share since Helen bought the stock. When sold, the stock will be taxed at capital gains rates (the long-term rate is 15
percent and the short-term rate is the taxpayer's marginal tax rate). Ignore the time value of money.
a. If Helen's marginal tax rate is 35 percent, how much would she save by holding the stock an additional month before selling?
Tax savings
b. What might prevent Helen from waiting to sell?
Helen bears
if she holds the stock for an additional month.
The stock price could
substantially if there is market volatility or if the company encounters financial difficulties.
In addition, Helen may be selling the stock
for which she may be unwilling to wait.

Expert Solution

Introduction

Marginal Tax rate

The marginal tax rate is the additional tax paid for each new dollar of income generated. The average tax rate is determined by dividing the entire amount of tax paid by the total amount of revenue received. A marginal tax rate of 10% means that every additional dollar earned is taxed at a rate of 10 dollars.

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