# Tax - calculation

A stock is expected to increase in value from \$500 to \$1,000 over a five-year period. The applicable capital gains tax rate is 28%. What is the expected after-tax value in five years? A) 860 B) 875 C) 890

860

when is the tax imposed?

Assuming at the end

500*(1-.28) = 500*.72 + 500 = 860

Assumed annually

500/500 = (1+ 100%) ^1/5 = 14.87% * 1-.28 = (10.7% + 1) ^ 5 = 1.66 = 831

Also, what is the cost basis of the position? If the person is buying today, at \$500, and selling at \$1000, then assuming the tax is applied at the end of the period, the value would be 860.

But if the cost basis is lower than 500, then the value may be higher.

Thanks. Correct it’s 860.

Kapaln calculation ( complicated than Galli’s straightforwrad one)

The pre-tax investment return is 14.87% =(\$1,000/\$500)(1/5) - 1. The formula for the future-value interest rate factor is FVIFCGT = [(1 + R)N(1 - TCG) + TCG] 1.72 = [(1.1487)5 (1 - 0.28) + 0.28]. Thus, the after-tax value in five years is expected to be \$860 = \$500 × 1.72.

not sure why you need to complicate all that so much.

500 became 1000 -> so capital gains = 500

tax = 500*28% = 140

so position = 1000 - 140 = 860

500 + (1000-500)(1-0.28)= 860

The guys above who asked: what are the cost bases; and whether it’s taxed annually. Seriously? like literally seriously?

^?

^ the point I was trying to make is not to over think the questions. Especially on Level 3.