1. Calculate the after-tax yields on the foregoing investments, assuming the Brittens have a 28 percent marginal tax rate.
2. How would you recommend the Brittens invest their $40,000? Explain your answer.
Bernie and Pam Britten are a young married couple beginning careers and establishing a household. They will each make about $60,000 next year and will have accumulated about $40,000 to invest. They now rent an apartment but are considering purchasing a condominium for $100,000. If they do, a down payment of $10,000 will be required.
They have discussed their situation with Lew McCarthy, an investment advisor and personal friend, and he has recommended the following investments:
• The condominium—expected annual increase in market value = 5 percent
• Municipal bonds—expected annual yield = 5 percent
• High-yield corporate stocks—expected dividend yield = 8 percent
• Savings account in a commercial bank—expected annual yield = 3 percent
• High-growth common stocks—expected annual increase in market value = 10 percent; expected dividend yield = 0