Marti Diego is deciding where to invest $10,000.The options include receiving a 5% capital gain or a 7% non-eligible dividend as the return on investment.Marti's marginal tax rates are 45% on regular income, 37% on non-eligible dividends, 28% on eligible dividends, and 23% (rounded) on capital gains.Which of the following statements is correct?
A)Marti will receive a higher after-tax rate of return on the capital gain due to the higher tax rate for non-eligible dividends.
B)Marti will receive an after-tax rate of return of 5% on the capital gain and 7% on the non-eligible dividends.
C)Marti will receive an after-tax rate of return of 3.85% on the capital gain and 4.41% on the non-eligible dividends.
D)There is no difference in the after-tax rate of return on the two investments.

Question

Quizplus · Accepted Answer

To calculate the after-tax rate of return, we need to multiply the return on investment by (1 - marginal tax rate).

For the 5% capital gain, the after-tax rate of return would be 5% x (1 - 23%) = 3.85%.

For the 7% non-eligible dividend, the after-tax rate of return would be 7% x (1 - 37%) = 4.41%.

Therefore, the best choice for Marti would be to invest in the non-eligible dividend option, as it provides a higher after-tax rate of return.

Marti Diego Is Deciding Where to Invest $10,000