Bernie and Pam brittten are a young couple beginning careers and establishing a household. They will each make about $50,000 next year and will have accumulated $40,000 to invest, they now rent an apartment but are considering purchasing a condominium for $100,000. If they do they are requred to have $10,000 down payment. Their friend is a investment advisor who has suggested these following investments. The condominium - expected annual increase in market value = 5%. Municipal bonds - expected annual yield = 5%. High-yield corporate stocks - expected dividend yield = 8%. Savings account in a commercial bank - expected annual yield = 3%. High-growth common stocks - expected annual increase in market value = 10%; expected dividend yield = 0. 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). How would you recommend the Brittens invest their $40,000? Explain your answer.

We'll be happy to comment on your ideas once you have written them up and reposted.

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To calculate the after-tax yields on the various investments, we need to consider the tax implications for each investment option.

1. Condominium:
The after-tax yield of the condominium investment will depend on the increase in market value. As stated, the expected annual increase in the market value is 5%. However, since there is no mention of any ongoing income (such as rental income) from the condominium, we can assume there will be no immediate tax implications on this investment. Therefore, the after-tax yield on the condominium investment remains 5%.

2. Municipal bonds:
Municipal bonds are typically exempt from federal income tax, so the after-tax yield would be equal to the expected annual yield of 5%.

3. High-yield corporate stocks:
The expected dividend yield from high-yield corporate stocks is 8%. Dividends from stocks are generally subject to taxes. To calculate the after-tax yield, we need to subtract the tax on dividend income. With a 28% marginal tax rate, the after-tax yield for high-yield corporate stocks would be 8% * (1 - 0.28) = 5.76%.

4. Savings account in a commercial bank:
The expected annual yield on a savings account is 3%. Similar to the condominium investment, if there is no additional income generated from the savings account, such as interest, there are no immediate tax implications. Therefore, the after-tax yield remains 3%.

5. High-growth common stocks:
High-growth common stocks provide returns through both an increase in market value and dividends. The expected increase in market value is 10%, and the expected dividend yield is 0%. Similar to high-yield corporate stocks, the after-tax yield on dividends would be 0% * (1 - 0.28) = 0%. However, the increase in market value may be subject to capital gains tax when the investment is sold, but there is no information provided on this. Assuming the increase in market value is realized, the after-tax yield will be 10%.

Now that we have calculated the after-tax yields of each investment option, we can recommend how the Brittens should invest their $40,000.

1. Condominium: The after-tax yield is 5%. If the Brittens are comfortable with the real estate market and its potential for growth, this could be a good long-term investment option.

2. Municipal bonds: The after-tax yield is 5%. Municipal bonds are generally considered low-risk investments, so this could be a stable option for the Brittens.

3. High-yield corporate stocks: The after-tax yield is 5.76%. This option offers a higher yield compared to the other investments but also carries more risk. The Brittens should consider their risk tolerance and long-term goals before investing in high-yield corporate stocks.

4. Savings account in a commercial bank: The after-tax yield is 3%. While this may not provide substantial returns, it offers stability and liquidity in the short term.

5. High-growth common stocks: The after-tax yield on dividends is 0%, but the potential for an increase in market value is 10%. This investment can be considered for long-term growth, but the Brittens should be prepared for potential tax implications when they decide to sell these stocks.

Based on their financial situation, risk tolerance, and goals, the Brittens could consider diversifying their investments. They can invest a portion of their $40,000 in the condominium, municipal bonds, and savings account for stability and lower risk. They can allocate a portion towards high-yield corporate stocks and high-growth common stocks for potential higher returns. It's important for them to carefully assess their individual circumstances and consult with a financial advisor to make the best decision for their specific needs.