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    Bernie and Pam Britten Taxes Case Study

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    Bernie and Pam Britten are a young married couple beginning careers and establishing a household. They will each make about $50,000 next year and will have accumulated about $40,000 to invest. They now rent an apartment but are considering purchasing a condominium for $100,000. If they do, a down payment of $10,000 will be required.

    They have discussed their situation with Lew McCarthy, an investment advisor and personal friend, and he has recommended the 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.

    1. 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).
    2. How would you recommend the Brittens invest their $40,000? Explain your answer.


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    Solution Preview

    Because there is $5,000 in equity appreciation per year, I would suggest that they buy the condo with the $10,000 down. Their interest payments would be covered by this, which are likely to be tax deductible. Then there is still $30,000 at hand to invest.

    Municipal bonds, which has no tax, will guarantee 5% after tax return rate, but will have relatively poor liquidity. (They can be sold before maturity at a high ...

    Solution Summary

    The solution calculates the investment yields based on tax rates for the Bernie and Pam case study.