Jones, who has a personal income tax rate of 40 percent, holds an oil stock that appreciates

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Jones, who has a personal income tax rate of 40 percent, holds an oil stock that appreciates in value by 10 percent each year. He bought the stock one year ago. Jones’s stockbroker now wants him to switch the oil stock for a gold stock that is equally risky. Jones has decided that if he holds on to the oil stock, he will keep it only one more year and then sell it. If he sells the oil stock now, he will invest all the (after-tax) proceeds of the sale in the gold stock and then sell the gold stock one year from now. What is the minimum rate of return the gold stock must pay for Jones to make the switch? Relate your answer to the tax on capital gains and to the lock-in effect.

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Public Finance In Canada

ISBN: 9781259030772

5th Canadian Edition

Authors: Harvey S. Rosen, Ted Gayer, Jean-Francois Wen, Tracy Snoddon

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