Tom has $15,000 cash in which to invest and is deciding between two investments. Investment A is a corporate bond that has an interest rate of 8% paid annually. Investment B is shares in ABC Company, a public company that currently trades at $10 per share. ABC has an expected growth of 6% annually and does not pay dividend. Both investments have the same risk. Tom expects to cash out his investment in 5 years. Assume that any after-tax proceeds from the investment will be reinvested in the same investment. Consider each question below independently.
Set-up the algebraic formula so that Tom can determine his marginal tax rate so that he is indifferent between the two investments (you may solve the marginal tax rate, but it is not required). Assume for this part (b) that Investment A has a 40% inclusion rate, and assuming that Tom's marginal tax rate is 40%, compute the annual growth rate in the shares of ABC so that Tom is indifferent between Investment A and Investment B.
Assume that the government decides to abolish the capital gains tax rate and tax everything on a 100% inclusion basis.