Hi All,
I have just got a question from Kaplan as following:
Question:
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?
Explanation:
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.
MY Question:
Why the last part of the formula is not multiplied with the 0.5 tax cost basis (B=500/1000).
The book identified the FVIFCGT formula like:
FVIFCGT = [(1 + R)^n*(1 – Tcg) + B*Tcg]
Many thanks in advance