Harper is considering three alternative investments of $10,000. Assume that the taxpayer is in the 24% marginal tax bracket for ordinary income and 15% for qualifying capital gains in all tax years. The selected investment will be liquidated at the end of five years. The alternatives are: • A taxable corporate bond yielding 5.333% before tax and the interest can be reinvested at 5.333% before tax. • A Series EE bond that will have a maturity value of $12,200 (a 4% before-tax rate of return). • Land that will increase in value. The gain on the land is classified and taxed as a long-term capital gain. The income from the bonds is taxed as ordinary income. How much must the land increase in value to yield a greater after-tax return than either of the bonds? For this analysis, ignore the effect of property taxes on the land. Below are the factors for the compound amount of $1 and compound value of annuity payments at the end of five years: $1 Annuity Compounded for Five Years Interest Rate 4% 5% $1 Compounded for Five Years 1.2167 1.2763 5.4163 5.5256 When required, round your answer to the nearest dollar. a. The taxable bond and reinvested earnings will accumulate at an after-tax rate of 4% The after-tax value of the taxable bond and reinvested earnings will be $ 12,167 be taxed each year. b. The income from the Series EE bond will not The after-tax value of the Series EE bond will be $ c. Because the gain on the land will be taxed as a long-term capital gain, the sales proceeds less 15% of the appreciation must
Harper is considering three alternative investments of $10,000. Assume that the taxpayer is in the 24% marginal tax bracket for ordinary income and 15% for qualifying capital gains in all tax years. The selected investment will be liquidated at the end of five years. The alternatives are: • A taxable corporate bond yielding 5.333% before tax and the interest can be reinvested at 5.333% before tax. • A Series EE bond that will have a maturity value of $12,200 (a 4% before-tax rate of return). • Land that will increase in value. The gain on the land is classified and taxed as a long-term capital gain. The income from the bonds is taxed as ordinary income. How much must the land increase in value to yield a greater after-tax return than either of the bonds? For this analysis, ignore the effect of property taxes on the land. Below are the factors for the compound amount of $1 and compound value of annuity payments at the end of five years: $1 Annuity Compounded for Five Years Interest Rate 4% 5% $1 Compounded for Five Years 1.2167 1.2763 5.4163 5.5256 When required, round your answer to the nearest dollar. a. The taxable bond and reinvested earnings will accumulate at an after-tax rate of 4% The after-tax value of the taxable bond and reinvested earnings will be $ 12,167 be taxed each year. b. The income from the Series EE bond will not The after-tax value of the Series EE bond will be $ c. Because the gain on the land will be taxed as a long-term capital gain, the sales proceeds less 15% of the appreciation must
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Harper is considering three alternative investments of $10,000. Assume that the taxpayer is in the 24% marginal tax bracket for
ordinary income and 15% for qualifying capital gains in all tax years. The selected investment will be liquidated at the end of five
years. The alternatives are:
• A taxable corporate bond yielding 5.333% before tax and the interest can be reinvested at 5.333% before tax.
• A Series EE bond that will have a maturity value of $12,200 (a 4% before-tax rate of return).
• Land that will increase in value.
The gain on the land is classified and taxed as a long-term capital gain. The income from the bonds is taxed as ordinary income.
How much must the land increase in value to yield a greater after-tax return than either of the bonds? For this analysis, ignore the
effect of property taxes on the land.
Below are the factors for the compound amount of $1 and compound value of annuity payments at the end of five years:
Interest Rate
4%
5%
$1 Compounded
for Five Years
1.2167
1.2763
$1 Annuity Compounded
for Five Years
5.4163
5.5256
When required, round your answer to the nearest dollar.
a. The taxable bond and reinvested earnings will accumulate at an after-tax rate of 4%
The after-tax value of the taxable bond and reinvested earnings will be $
12,167
be taxed each year.
b. The income from the Series EE bond will not
The after-tax value of the Series EE bond will be $
c. Because the gain on the land will be taxed as a long-term capital gain, the sales proceeds less 15%
of the appreciation must
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