Greg and Alice Wang, both in their 50s, have $100,000 to invest and plan to retire in 10 years. They are considering two investments. The first is a utility company common stock that costs $50 per share and pays dividends of $ 1 per share per year (a 2% dividend yield). Note that these dividends will be taxed at the same rates that apply to long-term capital gains. The Wangs do not expect the value of this stock to increase. The other investment under consideration is a highly rated corporate bond that currently sells for $1,000 and pays annual interest at a rate of 2.5%, or $25 per $1,000 invested. After 10 years, these bonds will be repaid at par, or $1,000 per $1,000 invested. Assume that the Wangs keep the income from their investments but do not reinvest it (they keep the cash in a non-interest-bearing bank account). They will, however, need to pay income taxes on their investment income. They will sell the stock after 10 years if they buy it. If they buy the bonds, in 10 years they will get back the amount they invested. The Wangs are in the 33% tax bracket.

How much will they receive after taxes each year in dividend income if they buy the stock?

Suggested solution:

Since the Wangs come under the 33% tax bracket their respective long term capital gains(LTCG) tax rate will be 15%.(R)

Total dividend = 2000x1 = $2,000 per year.

Net dividend income received post tax = Dividend due * (1- r) = 2000x(1-0.15) = $1700

REQUIRED:

BASED ON THE SUGGESTED SOLUTION, EXPLAIN WHY 33% TAX WILL BE CONVERTED TO 15%. I NEED FURTHER EXPLANATION ON THIS AS IT WAS REALLY UNCLEAR FROM MY TEACHER.