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2. Louise Hammer is a taxpayer who will be in the 40% marginal tax bracket for the next 40 years. She looks at her budget and sees that she will have $2,400 left from her take-home pay, after expenses. She will save everything of this by putting it in an RRSP. The money in the RRSP will be invested in a diversified portfolio of shares. The long-run return on these shares is expected to be 12% pa. capital gains and 3% pa. dividends, for a total before-tax return of 15%. At the end of 40 years she will withdraw all the money in a lump sum, and pay tax on it at a rate of 50%. Ed Anvil is a taxpayer who has the identical tax situation and budget expectations as Louise. He has decided to invest his savings outside an RRSP to take advantage of the capital gains' lower rate and dividend tax credit. He plans to do this for 18 years, using the same diversified portfolio as Louise. The after-tax dividend yield is 2%. The after-tax capital gains yield is 8%. From year 19 to year 40, he does exactly the same as Louise with his savings. At the end of 40 years he collapses his investments and pays tax as applicable at the rate of 40%. His rate is lower than Louise's because she has put her- self into a higher tax bracket by not paying taxes earlier. Neither Ed nor Louise has an employer pension plan. (a) What does Louise have left in 40 years after paying taxes? (b) What does Ed have left in 40 years after paying taxes? (Be very careful The tax rules have an immediate effect on their savings.) (c) What is the present value of the taxes Louise will pay in 40 years? (d) Ed recognizes he can do better than in part (b). He earns $50,000 every year, so his contribution limit is $9,000 p.a. Assume he has seven years of unused contribution. He decides he will contribute $21,000 to his