A taxpayer can invest $ 5,000 in a common stock that pays no dividends but appreciates at a rate of 8%. The taxpayer’s tax rate is 30%. He plans to sell the stock after 30 years.
a. Find the after tax accumulation and the annualized after tax rate of return for this investment.
b. What would have been the annualized after tax rate of return on the stock if there were a special tax rate of 20% on capital gains? (Exercise adapted from problem written by Richard Sansing, Dartmouth College.)