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? Below are the factors for the compound amount of $1 and compound value of annuity payments at the end of five years: Interest Rate $1 Compounded for Five Years $1 Annuity Compounded for Five Years 4% 1.2167 5.4163 5% 1.2763 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 $. b. The income from the Series EE bond will not be taxed each year. The after-tax value of the Series EE bond will be $____.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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?

Below are the factors for the compound amount of $1 and compound value of annuity payments at the end of five years:

Interest Rate	$1 Compounded for Five Years	$1 Annuity Compounded for Five Years
4%			1.2167	5.4163
5%			1.2763	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 $____________.

b. The income from the Series EE bond will not be taxed each year.
The after-tax value of the Series EE bond will be $________________.

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