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21 March, 21:36

Investor Palmer has a diversified portfolio consisting of equity and debt valued at $365,000 at the start of the year. During the year the portfolio returns $3,579 in dividends and $2,783 in interest income. The investor withdraws the interest income while reinvesting the dividends. At year-end the portfolio is worth $389,648. The investor's marginal tax bracket is 35%. Without compounding, what is the investor's return after taxes?

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  1. 21 March, 22:41
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    The return after taxes is 7.9%

    Explanation:

    At the start of the year the portfolio is valued at $365,000.

    At the end, his portfolio has returns by dividends ($3,579), interests ($2,783) and portolio's valuation (389,648-365,000=$24,648).

    The tax is applied to the dividends and interests, as:

    Tax = 0.35 * (3579+2783) = 0.35*6362 = $2,226.70

    We can then calculate the investor's return as

    R = profit after taxes / initial portfolio valuation

    R = ((3579 + 2783 - 2226.70) + 24648) / 365000

    R = 28,783.30 / 365,000 = 0.079 = 7.9%
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