CFA Level I · CFA Level I Exam · Types of Financial Returns
An investor buys a share for 50.00, receives a dividend of 2.00 taxed at 20%, and sells it at year-end for 56.00, with a capital gains tax of 25% on the gain. Ignoring transaction costs, the after-tax holding period return is closest to:
The after-tax holding period return is about 12.4%, the closest option to the exact 12.2%. The dividend nets 1.60 after 20% tax and the capital gain nets 4.50 after 25% tax, totalling 6.10 on a 50.00 investment. The 16.0% option is the pre-tax return.
- A10.2%Correct
- B12.4%
- C16.0%
Explanation
After-tax dividend = 2.00 × 0.80 = 1.60. Capital gain = 6.00, tax = 1.50, after-tax gain = 4.50. Total after-tax gain = 6.10; 6.10 / 50 = 12.2%. This is closest to 12.4%, not 10.2%. Check: 16.0% is the pre-tax return (8/50), and 10.2% results from taxing both items at an inappropriately high rate.
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