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feel their earnings have been adequately sheltered. Because they did not
make any portfolio transactions during the past year, all of the
Stalchecks’s investments have been held more than 12 months, and they
would have to consider only unrealized capital gains, if any. To make
the necessary calculations, the Stalchecks have gathered the following
information on each investment in their portfolio.
Common stock. They own 400 shares of KJ Enterprises common stock.
KJ is a diversified manufacturer of metal pipe and is known for its
unbroken stream of dividends. Over the past few years, it has entered
new markets and, as a result, has offered moderate capital appreciation
potential. Its share price has risen from $17.25 at the start of the last
calendar year to $18.75 at the end of the year. During the year, quarterly
cash dividends of $0.20, $0.20, $0.25, and $0.25 were paid.
Industrial bonds. The Stalchecks own eight Cal Industries bonds. The
bonds have a $1,000 par value, have a 9.250% coupon, and are due in
2027. They are A-rated by Moody’s. The bonds were quoted at 97.000 at
the beginning of the year and ended the calendar year at 96.375%.
Mutual fund. The Stalchecks hold 500 shares in the Holt Fund, a
balanced, no-load mutual fund. The dividend distributions on the fund
during the year consisted of $0.60 in investment income and $0.50 in
capital gains. The fund’s NAV at the beginning of the calendar year was
$19.45, and it ended the year at $20.02.
Options. The Stalchecks own 100 options contracts on the stock of a
company they follow. The value of these contracts totaled $26,000 at the
beginning of the calendar year. At year-end the total value of the options
contracts was $29,000.
Questions
a.
Calculate the holding period return on a before-tax basis for
each of these four investments.
b.
Assuming that the Stalchecks’s ordinary income is currently
being taxed at a combined (federal and state) tax rate of 38% and
that they would pay a 15% capital gains tax on d