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Mike and Julie Bedard are a working couple. They will file a joint income tax return. This year, they have the following taxable income: 1. $125,000 from.

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Presentation on theme: "Mike and Julie Bedard are a working couple. They will file a joint income tax return. This year, they have the following taxable income: 1. $125,000 from."— Presentation transcript:

1 Mike and Julie Bedard are a working couple. They will file a joint income tax return. This year, they have the following taxable income: 1. $125,000 from salary and wages (ordinary income). 1. $125,000 from salary and wages (ordinary income). 2. $1000 in interest income. 2. $1000 in interest income. 3. $3000 in dividend income. 3. $3000 in dividend income. 4. $2000 in profit from sale of stock they purchased two years ago. 4. $2000 in profit from sale of stock they purchased two years ago. 5. $2000 in profit from a stock they purchased this year and sold this year. 5. $2000 in profit from a stock they purchased this year and sold this year. Interest and short-term capital gains are taxed at the ordinary rate while long-term capital gains and dividends are taxed at a lower rate of 15%. Question #1: How much will Mike and Julie pay in federal income taxes on 2 above? This problem is from the 11th edition of Fundamentals of Investing. Click for a federal income tax rate table. Cash FlowAmountRateTax Interest$1,00025%$250

2 Mike and Julie Bedard are a working couple. They will file a joint income tax return. This year, they have the following taxable income: 1. $125,000 from salary and wages (ordinary income). 1. $125,000 from salary and wages (ordinary income). 2. $1000 in interest income. 2. $1000 in interest income. 3. $3000 in dividend income. 3. $3000 in dividend income. 4. $2000 in profit from sale of stock they purchased two years ago. 4. $2000 in profit from sale of stock they purchased two years ago. 5. $2000 in profit from a stock they purchased this year and sold this year. 5. $2000 in profit from a stock they purchased this year and sold this year. Interest and short-term capital gains are taxed at the ordinary rate while long-term capital gains and dividends are taxed at a lower rate of 15%. Question #2: How much will Mike and Julie pay in federal income taxes on 3 above? This problem is from the 11th edition of Fundamentals of Investing. Click for a federal income tax rate table. Cash FlowAmountRateTax Dividends$3,00015%$450

3 Mike and Julie Bedard are a working couple. They will file a joint income tax return. This year, they have the following taxable income: 1. $125,000 from salary and wages (ordinary income). 1. $125,000 from salary and wages (ordinary income). 2. $1000 in interest income. 2. $1000 in interest income. 3. $3000 in dividend income. 3. $3000 in dividend income. 4. $2000 in profit from sale of stock they purchased two years ago. 4. $2000 in profit from sale of stock they purchased two years ago. 5. $2000 in profit from a stock they purchased this year and sold this year. 5. $2000 in profit from a stock they purchased this year and sold this year. Interest and short-term capital gains are taxed at the ordinary rate while long-term capital gains and dividends are taxed at a lower rate of 15%. Question #3: How much will Mike and Julie pay in federal income taxes on 4 above? This problem is from the 11th edition of Fundamentals of Investing. Click for a federal income tax rate table. Cash FlowAmountRateTax LT Cap Gains $2,00015%$300

4 Mike and Julie Bedard are a working couple. They will file a joint income tax return. This year, they have the following taxable income: 1. $125,000 from salary and wages (ordinary income). 1. $125,000 from salary and wages (ordinary income). 2. $1000 in interest income. 2. $1000 in interest income. 3. $3000 in dividend income. 3. $3000 in dividend income. 4. $2000 in profit from sale of stock they purchased two years ago. 4. $2000 in profit from sale of stock they purchased two years ago. 5. $2000 in profit from a stock they purchased this year and sold this year. 5. $2000 in profit from a stock they purchased this year and sold this year. Interest and short-term capital gains are taxed at the ordinary rate while long-term capital gains and dividends are taxed at a lower rate of 15%. Question #4: How much will Mike and Julie pay in federal income taxes on 5 above? This problem is from the 11th edition of Fundamentals of Investing. Click for a federal income tax rate table. Cash FlowAmountRateTax ST Cap Gains $2,00025%$500

5 This problem is from the 11th edition of Fundamentals of Investing. Market value of securities at purchase =100* $80= $8,000 Debit balance in the transaction =.40 * $8,000 = $3,200 Given a maintenance margin of 25%, the stock has to fall to $42.67 per share in order to justify a margin call; that is: On a per share basis, this translates to: $4,267/100 = $ Note: This problem could also be solved by using a “hit-and-miss” approach which finds a value for V in the margin (%) formula that results in a margin of 25%: Question #5: Jerri Kingston bought 100 shares of stock at $80 per share using an initial margin of 60%. Given a maintenance margin of 25%, how far does the stock have to drop before Jerri faces a margin call? (Assume that there are no other securities in the margin account.)

6 $1,000 loss. This is because her short sale would have realized $6,000, while the replacement of the shares would cost Courtney Schinke $7,000. Elmo Inc’s stock is currently selling at $60 per share. For each of the following situations (ignoring brokerage commissions), calculate the gain or loss that Courtney Schinke realizes if she makes a 100-share transaction. Elmo Inc’s stock is currently selling at $60 per share. For each of the following situations (ignoring brokerage commissions), calculate the gain or loss that Courtney Schinke realizes if she makes a 100-share transaction. Question #6: She sells short and repurchases the borrowed shares at $70 per share. This problem is from the 11th edition of Fundamentals of Investing.

7 A profit of $1,500. The long position would initially cost Courtney Schinke $6,000. When she sells the stock at $75 per share, she is realizing $15 per share ($75 - $60) in profit for a total of $1,500 (100 shares at $15 per share). Elmo Inc’s stock is currently selling at $60 per share. For each of the following situations (ignoring brokerage commissions), calculate the gain or loss that Courtney Schinke realizes if she makes a 100-share transaction. Elmo Inc’s stock is currently selling at $60 per share. For each of the following situations (ignoring brokerage commissions), calculate the gain or loss that Courtney Schinke realizes if she makes a 100-share transaction. Question #7: She takes a long position and sells the stock at $75 per share. This problem is from the 11th edition of Fundamentals of Investing.

8 $1,500 profit. The short sale brings in $6,000, while the return of the shares to the owner costs only $4,500. Elmo Inc’s stock is currently selling at $60 per share. For each of the following situations (ignoring brokerage commissions), calculate the gain or loss that Courtney Schinke realizes if she makes a 100-share transaction. Elmo Inc’s stock is currently selling at $60 per share. For each of the following situations (ignoring brokerage commissions), calculate the gain or loss that Courtney Schinke realizes if she makes a 100-share transaction. Question #8: She sells short and repurchases the borrowed shares at $45 per share. This problem is from the 11th edition of Fundamentals of Investing.

9 A breakeven situation. The long position costs Courtney Schinke $6,000, and the sale of the stock brings in $6,000, thereby providing neither a profit nor a loss. Elmo Inc’s stock is currently selling at $60 per share. For each of the following situations (ignoring brokerage commissions), calculate the gain or loss that Courtney Schinke realizes if she makes a 100-share transaction. Elmo Inc’s stock is currently selling at $60 per share. For each of the following situations (ignoring brokerage commissions), calculate the gain or loss that Courtney Schinke realizes if she makes a 100-share transaction. Question #9: She takes a long position and sells the stock at $60 per share. This problem is from the 11th edition of Fundamentals of Investing.

10 The answer is that the stockholder will have to take the loss. If a firm goes bankrupt, bondholders are first in line for repayment of the firm’s debt. Any leftover money will go to the stockholders. At the end of the video, Bonds vs. Stocks, the question is raised about which security holder, bondholder or stockholder, will “eat” the loss. What is the answer; i.e. who will “eat” the loss? Question #10: She takes a long position and sells the stock at $60 per share. This problem is from the 11th edition of Fundamentals of Investing.


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