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Personal Finances: After-Tax Yields

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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.

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.

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Solution Summary

This tutorial provides guidelines on how to calculate the after-tax yields on the foregoing investments a newly-wed couple has invested in.

Solution Preview

Please refer to the Excel for a full solution.
Steps:
a ) Calculate the after tax return on each of the investments. After tax return= Pretax return*(1-tax rate)

b) Compare the after tax returns on each investments and Selecting the investment on risk -return appetite

Let us calculate the After tax returns on each of them:

A. The ...

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