Investment Evaluation Essay
Currently the couple is living in a rented apartment and will have saved $40,000 for investment purposes. There are five investment options available for the couple which includes purchasing a condominium by paying the down payment of $10,000, investing in municipal bonds, high-yield corporate stocks, keeping the money in a savings account or investing in high growth common stocks. The after tax yields of Bernie and Pam Britten will be calculated by applying the marginal tax rate of 28% on all the investment options.
The tax rate would be applied to all the investment options except the Municipal bonds as they are exempted from tax (Temel, 2001). The after tax yields will be calculated by the following formula: After Tax Yield = Pre-Tax Yield (1-Tax rate) The condominium is expected to increase in market value at a rate of 2% per year. This is the expected increase in market value of the condominium and not the return or yield on investment as the couple would be living in it. Though for decision making purposes the 2% increase in value will be taken into consideration.
The municipal bonds are tax exempt and the after tax yield would be same as the pretax yield
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After Tax Yield = 0. 01 (1 – 0. 28) After Tax Yield = 0. 0072 or 0. 72% The high growth common stocks have an expected dividend yield of 0 but the expected 6% increase in market value will be considered for decision making purposes. 2. Expected savings for the Brittens is $40,000 in the next year and they are currently living in a rented apartment incurring rental expense. The couple should pay $10,000 down payment for the condominium and start living in it which will save them the rental expense of the apartment.
The couple would have $30,000 after paying the down payment plus the savings from the rent. The installment payments for the condominium have to be considered as well. The $30,000 should be invested in various areas to diversify risk and return. Some of the money should be invested in municipal bonds as they have a tax-free yield of 5% and is not as risky as compared to other options with higher returns. In order to increase the return some amount should also be invested in high growth common stocks.
Though these stocks do not have a dividend yield but the couple could benefit from the 6% increase in market value. The savings from the rental expense could be invested in the high yield corporate stocks to earn after tax dividend yield of 3. 6%. The condominium will appreciate in market value at a rate of 2% per annum and the corporate growth stocks would appreciate at 6% per annum. The Jobs and Growth Tax Relief Reconciliation Act of 2003 has also reduced the tax burden on capital gains and dividends (U.
S. Congress, 2003). The increase in value of the condominium and investments would be beneficial for the couple after 8 to 10 years. The couple can then sell the condominium and realize profits on all the investments made. References Temel, J. W. (2001). The Fundamentals of Municipal Bonds. New Jersey: John Wiley & Sons, Inc. U. S. Congress. (2003). Jobs and Growth Tax Relief Reconciliation Act. Washington: U. S. Congress.