Question

Komiko Tanaka invests $19,500 in LymaBean, Inc. LymaBean does not pay any dividends. Komiko projects that her investment will generate a 10 percent before-tax rate of return. She plans to invest for the long term. a. How much cash will Komiko retain, after-taxes, if she holds the investment for 5 years and then she sells it when the long-term capital gains rate is 15 percent? (Do not round intermediate calculations. Round your final answer to the nearest whole dollar amount.)

Answer 1

Answer: $29,619

Explanation:

Given that,

Investment = $19,500

Investment will generate(r) = 10 percent before-tax rate of return

Tenure = 5 years

$Amount\ received\ after\ 5\ years=Invested\ amount\times(1+r)^{n}$

$Amount\ received\ after\ 5\ years=19,500\times(1+0.10)^{5}$

                                                              = $19,500 × 1.61051

                                                              = $31,404.945

Basis in stock = $19,500

Long term capital gain = Amount received - Basis in stock

                                      = $31,404.945 - $19,500

                                      = $11,904.945

Tax on gain = Long term capital gain × rate

                    = $11,904.945 × 15%

                    = $1,785.74

Cash retained = Amount received - Tax on gain

                        = $31,404.945 - $1,785.74

                        = $29,619.205

                         = $29,619

Therefore, $29,619 cash will Komiko retain, after-taxes.