Question

1). Kelly purchased ten shares of Gentech stock for $200 in year 1 and sold all the shares in year 2 for $220 a share. Between year 1 and year 2, the price level increased by 5%. The tax on capital gains is 50%. If the capital gains tax is on nominal gains, calculate how much tax Sally pays on her gain. Calculate Kelly's capital gains if the tax is on real gains.

2). Sally purchased one share of Stryker stock for $200 in year 1 and sold that share in year 2 for $400. The inflation rate between year 1 and year 2 was 50%. If the capital gains tax is 50%, calculate Sally's after tax real capital gain if the tax is on nominal gains? What is it if the tax is on real gains?

Answer 1

1) Nominal gains are 220-200 = $20, with a 50% tax rate, tax=$10 Real gains are 220 - (1.05*200) = $10, tax on real gains, if real gains is the base, is $5

2) Nominal gains are 400-200=$200, real gains are 400-1.5*200 = $100. Tax on nominal gains is $100. So after tax real capital gain is real gains less nominal tax or 100-100 = 0.
If real gains are the tax base, the tax on real gains would be $50.

Answer 2

The previous solution is right except that it requires to multiply everything by 10 because she purchased 10 shares

Answer 3

Question #1 is written poorly. If read how it is written. She purchased 10 shares for a total cost of $200. The next year she sold all 10 shares for $220 each, resulting in $2200. That leaves her with nominal gains of $2000. 50% of that is $1000.

Answer 4

Sam has 10 shares of a company. Based upon the company's dividend policy, Sam will receive a total of $450 per year in perpetuity. What is the value of each share if the rate of interest is 8 percent?