Question
Suppose you buy a stock in the company XYZ at 10:00am in the morning, because you believe that XYZ will beat their earnings forecasts. XYZ
Suppose you buy a stock in the company XYZ at 10:00am in the morning, because you believe that XYZ will beat their earnings forecasts. XYZ is a highly liquid, frequently traded stock with a positive beta. At 2:00pm the earnings are announced. You sell the stock right after 2pm. Taxes are owed whenever the price you sell a stock at is higher than the price you paid for it. If necessary, assume your tax rate for income and capital gains is 19% and that there are no other taxes. While the market earned a return of 0.25% over that period from 10:00 to 2:00pm, you earned an abnormal return of zero for your trade (much to your disappointment).
B4a. Will you owe taxes on this transaction? (Answer "Yes" or "No") [1 mark]
B4b. Why or why not? [3 marks]
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