Question asks: What is the difference between the pre-tax return and the after-tax return? US investor. Info: Buys 100 shares when trading at EUR28 (current rate is 1EUR=.8USD) Gets div of 1EUR per share (rate is 1EUR=.85 USD) Sells shares for EUR30 (rate is 1EUR=.85 USD) Greece cap gains tax/Div tax: 15% US Cap gains tax/dividend tax: 28% a)8.71% b)13.02% c)1.43% d)4.93% In the answer to find the after-tax return, they take 2550-2240-86.80+72.25+12.75-23.80. I understand taking the cap gain, and subtracting the tax…then on the dividend its taxed in both places and the credit is added back. But after the dividend has been taxed in Greece, when taxing in the US, they subtract 23.80. I dont get that. Shouldnt it be (72.25*.28=20.23). Anyone have an answer to this one? Thanks guys. Its question number 29272 in schweser bank…from study session 10 reading 38, LOS i
I come up with d) 4.93%: a roughly 17.6% return pre-tax and 12.7% after-tax return.
In these I normally try to ignore the foreign tax rates if they are fully rebated since essentially they do not matter. So the cost initially was 2,800EUR = $2,240 Dividends of 100EUR = $85 Sold shares for 3,000EUR = $2,550 Pre-tax return is easy [($2,550+$85)/$2,240] - 1 = 17.63% Then just apply the US tax on the gains. Gains = $2,550+$85 - $2,240 = $395 Tax on gains = $395*.28 = $110.6 Now just adjust your return by subtracting the tax you had to pay on your gains. So after tax return = [($2,550+$85-$110.0)/$2,240] - 1 = 12.7% Difference = 17.63% - 12.7% = 4.93%
85 * .28 =23.8 it looks like they are subtracting the US tax and adding back the foreign tax as it is rebated in the answer you show.
thank you.