Suppose that an investor purchased 100 shares of IBM stock a

Suppose that an investor purchased 100 shares of IBM stock at a price of $100 on December 31, 2012. During the year 2013, IBM paid dividends of $2.00 per share, and at the end of the year, the investor sold the stock at a price of $115.

A. If there were no taxes or inflation, what was the total return?

B. If there were no taxes but inflation was 5 percent, what was the real return?

C. If the tax rate was 15 percent on dividends and capital gains, what was the after-tax real return? (Hint: Combine the inflation and the taxes to get your answer. Also, you have two taxes to consider, the dividend and capital gains.)

Solution

1. =(Dividend +Ending Price)/Beginning Price-1=(2+115)/100-1=17%

2. =(1+nominal return)/(1+inflation)-1=1.17/1.05-1=11.43%

3. =(1+nominal return*(1-tax rate))/(1+inflation)-1=(1+17%*(1-15%))/1.05-1=9%