First Requirement: Computation of the after-tax yield for each investment option
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- The condominium's expected annual increase in market value is 2% and the gain generally will not be taxed, assuming the couple will use the property as their primary residence.
- The Municipal bonds are tax-free. The expected annual yield will still be 3%.
- For the High-yield corporate stocks, the qualified dividends will be taxed at 15%. (For individuals with income tax of 25% or higher, qualified dividends tax rate is 15%). Therefore, the after tax yield for this investment will be 4.25%= [5 % (1-.15)].
- Savings account in a commercial bank will be taxed at a regular rate of 28%. The after-tax yield will be .72% = [1 %( 1-.28)].
- Gains from the high growth common stocks will be taxed at 15%, assuming these stocks will be held for more than a year. The after-tax yield will be 5.1%= [6% (1-.15)]
Second Requirement: Reccomendations
The Brittens should decide on taking the condominium with the $10 000 down payment. Purchasing the property will give rise to additional tax savings on mortgage interest and real estate taxes. Taking this option, the couple need not pay for rent expense. The condominium's market value also appreciates over time without any tax consequences. This gain will only be realized and be taxable if the property will be sold in the future.
A savings account will be useful in case the need for liquid instruments arises. The couple may opt for a savings account by allocating a small portion of their remaining funds available for investment. This is a low yielding option and may be considered more of a security fund than an investment.
The remaining amount available may be allocated to the remaining investment opportunities. If the couple considers profitability, the best option will be the high growth common stocks that yield after-tax gains of 5.1% and are only be taxed when sold. However, this option comes with higher risk and also these funds are less liquid. If the couple considers taking lesser risks, buying Municipal Bonds will weigh as a good choice. Municipal bonds are tax-free and are less risky.