1. In order to make a numerical comparison, an assumption must be made for the ultimate disposition date of the investment. Because the question provides information for five years, this time frame is assumed.

If Jordana keeps the Cory shares, after five years she will have:

$50,000 x 10% x 5 years =…………………	$80,525
Less tax on sale after year 5,
45% x 1/2($80,525‑$20,000) …………………	(13,618	)
………………………………………………………	$66,907

If she sells Cory and buys J2 shares, after five years she will have:

Sale of Cory in the current year…………………	$50,000
Tax 45% x ½ ($50,000‑$20,000) …………………	(6,750	)
Cash for J2 investment…………………	$43,250
Value of J2 investment:
After 5 years $43,250 x 13% x 5 years…………………	$79,685
Less tax on sale after 5 years
45% x 1/2 ($79,685‑$43,250) …………………	(8,198	)
………………………………………………………	$71,487

Assuming Jordana will dispose of her investment after 5 years, she should sell the Cory shares and purchase J2 shares as her after‑tax proceeds are $71,487 versus $66,907.

The decision is more difficult if she will not dispose of her investment after five years.

2.   Rate of return required on the J2 shares to justify a sale of the Cory shares:

The J2 shares must earn a sufficient return to provide at least $66,907 after tax at the end of five years on an investment of only $43,250.

Therefore the selling price after five years must be:

Selling price ‑ tax = $66,907

Selling price ‑ .45(1/2) (selling price ‑ $43,250) = $66,907

Selling price = $73,775

The pre‑tax return on $43,250 to yield $73,775 after 5 years is = 11.27%