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In December 1988, exactly four years ago, you purchased shares in a mutual fund for $500. Although all the dividends were reinvested in the fund,
In December 1988, exactly four years ago, you purchased shares in a mutual fund for $500. Although all the dividends were reinvested in the fund, you had to pay personal taxes at a rate of 20 percent on the dividends paid into your account each year. The current value of the shares you own, including those obtained from dividend reinvestment, is $705.80. If the shares are sold, you will be subject to a capital gains tax of 20 percent (capital gains = proceeds from sale - original cost of all shares). The dividends paid and reinvested are shown below. What is your pretax rate of return to date? If you sell all the shares now, what will be your after tax rate of return? (Assume that taxes are paid in the same year that dividends are paid and that all payments and receipts are at the end of the year.)
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