Brittens Assignment

Bernie and Pam Britten argon a young married suspender beginning c areers and establishing a household. They will each make about $50,000 undermentioned year and will suffer accumulated about $40,000 to invest. They now look at an apartment but are considering purchasing a condo for $100,000. If they do, a down payment of $10,000 will be required. They have discussed their situation with Lew McCarthy, an investing advisor and personal friend, and he has recommended the following investments The condominium expected yearly increase in market trade account = 5%.municipal bonds expected annual rejoinder = 5%. High- devote corpo account depots expected dividend yield = 8%. nest egg account in a commercial bank-expected annual yield = 3%. High-growth customary stocks expected annual increase in market value = 10% expected dividend yield = 0. Calculate the after- revenue enhancement yields on the foregoing investments, expect the Brittens have a 28% marginal revenue en hancement rate (based on Public Law 108-27, The Jobs and increment Tax Relief Reconciliation turn of 2003). How would you recommend the Brittens invest their $40,000? SolutionWe use the provisions outlined in The Jobs and outgrowth Tax Relief Reconciliation Act of 2003 to exercise the applicable tax revenue rates to be faced by the Brittens a married distich field of operation to a 28% marginal tax rate for the varied investment decisions they will pursue. Given that the tax-free yield for each investment has been provided, we compute for the after-tax yield using this formula After-Tax admit = Tax-Free Yield x (1 tax rate). But first, let us determine the tax rate applicable to the Brittens for each of the investments.A. The condominium expected annual increase in market value = 5%. The 5% increase in market value of the condominium is not subject to taxes. While taxes are set at 18%, the Brittens can expense up to $100,000 of the berth pursuant to the Section 179 Exp ensing, and can take advantage of the bonus depreciation. Hence, tax rate is de minimis, or maybe assumed at 0%. B. Municipal bonds expected annual yield = 5%. Any annual yield from municipal bonds is not taxed at the Federal Level.Municipal bonds are usually-tax exempt. Hence, tax rate is 0%. C. High-yield corporate stocks expected dividend yield = 8%. Dividends received by a stockholder are taxed the same way as roof pass income. The 8% dividend yield, if it qualifies as a qualified jacket crown gain or dividend, will be subject to the 15% tax rate, for the Brittens. D. nest egg account in a commercial bank-expected annual yield = 3%. Savings account in a commercial bank is subject to the Brittens marginal tax rate, which is 28%. E.High-growth common stocks expected annual increase in market value = 10% expected dividend yield = 0. High-growth common stocks are subject to 15% taxes. While the yield, which is subject to capital gains tax, is 0, any gain from the disposition of stock is considered a gross income, and is considered a capital gain, which is subject to 15% tax. Using those tax rates, we can compute for the after-tax yields Pre-Tax Yield Tax After-Tax Yield Condominum 5% 0% 5. 00% Municipal Bonds 5% 0% 5. 00% HY Corporate Stocks 8% 15% 6. 80%Savings circular 3% 28% 2. 16% HG Common Stocks 10% 15% 8. 50% Basing from the after-tax yield itself, the best investment for the Brittens would be the High Growth Common stock. The Brittens 40,000 dollar investment may grow by 8. 50% if the whole amount is invested in High Growth Common Stock. However, if we take in to account the risks and the degrees of liquidity, or if the investment could be easily morose to cash. Municipal bonds and savings account (which are guaranteed) for example, while low yield, have low default risks.High yield corporate stocks, and high growth common stocks, while high yield, are subject to the volatility of the stock market, and are very high risk. Stock prices are fluc tuating everyday, and the value of the stock would depend upon the companys performance and investor interest on the company. The condominium investment is medium risk, since it is also subject to supply and demand rattling estate investments, for example, at these times are subject to risk cod to the subprime mortgage crisis.