Singh, who has a federal personal income tax rate of 28 percent, holds an oil stock that appreciates in value by 10 percent each year. He bought the stock one year ago. Singh’s stock-broker now wants him to switch the oil stock for a gold stock that is equally risky. Singh has decided that if he holds on to the oil stock, he will keep it only one more year and then sell it. If he sells the oil stock now, he will invest all the (after- tax) proceeds of the sale in the gold stock and then sell the gold stock one year from now. What is the minimum rate of return the gold stock must pay for Singh to make the switch? Relate your answer to the lock- in effect.
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