Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Jason and Kerri Consalvo, both in their 5 0 ' s , have $ 5 1 , 0 0 0 to invest and plan to
Jason and Kerri Consalvo, both in their s have $ to invest and plan to retire in years. They are considering two investments. The first is a utility company common stock that costs $ per share
and pays dividends of $ per share per year a dividend yield Note that these dividends will be taxed at the same rates that apply to longterm capital gains. The Consalvos 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 $ and pays annual interest at a rate of or $ per $ invested. After
years, these bonds will be repaid at par, or $ per $ invested. Assume that the Consalvos keep the income from their investments but do not reinvest it they keep the cash in
a noninterestbearing bank account They will, however, need to pay income taxes on their investment income. If they buy the stock, they will sell it after years. If they buy the bonds, in years they will
get back the amount they invested. The Consalvos are in the tax bracket.
Note: The tax rate on dividends for the Consalvos will be and your calculations should ignore the tax on
investment income that was part of the Affordable Care Act.
a How many shares of the stock can the Consalvos buy?
b How much will they receive after taxes each year in dividend income if they buy the stock?
c What is the total amount they would have from their original $ if they purchased the stock and all went as planned?
d How much will they receive after taxes each year in interest if they purchase the bonds?
e What is the total amount they would have from their original $ if they purchased the bonds and all went as planned?
f Based only on your calculations and ignoring other risk factors, should they buy the stock or the bonds?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started