Calculate the after tax yields on the foregoing investments, assuming the Brittens have a 28% marginal tax rate (based on Public Law 108-27, The Jobs and Growth Tax Relief Reconciliation Act of 2003).
Municipal bonds expected annual yield = 5%.
High Growth common stocks expected annual increase in market value = 10%; expected dividend yield = 0.
The yield on the munis will be the after-tax yield also: 5%
The after-tax yield on the non-dividend-paying growth common stocks, if held long enough to qualify for long term capital gains tax rate of 15%, would be 10% (1 - 0.85) = 8.5%
I now need the high growth common stocks - expected annual increase in market value= 10% ; expected dividend yield = 0
I answered that already
Apologies for the repetition. To clarify, the after-tax yield on municipal bonds is equal to the expected annual yield, which is 5%. This is because municipal bond interest is usually exempt from federal income tax. Therefore, the full yield is realized by the investor.
For high-growth common stocks with an expected annual increase in market value of 10% and no expected dividend yield (0%), the after-tax yield can be calculated based on long-term capital gains tax rates.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced the long-term capital gains tax rate to 15% for individuals in the 28% marginal tax bracket. To calculate the after-tax yield, subtract the tax rate (15%) from 100% (1), which equals 85% (0.85).
Therefore, the after-tax yield on the high-growth common stocks would be 10% multiplied by (1 - 0.85) = 8.5%. This means that after accounting for taxes, the investor can expect an 8.5% return on the high-growth common stocks.