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## Investment Decisions

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Investment Decisions Bernie and Pam Britten are a young married couple beginning careers and establishing a household. They will each make about \$50,000 next year and will have accumulated about \$40,000 to invest. They now rent an apartment but are considering purchasing a condominium for \$100,000. If they do, a down payment of \$10,000 will be required. They have discussed their situation with Lew McCarthy, an investment advisor and personal friend, and he has recommended the following investments: â€¢ The condominium – expected annual increase in market value = 2%. â€¢ Municipal bonds – expected annual yield = 3%. â€¢ High-yield corporate stocks – expected dividend yield = 5%. â€¢ Savings account in a commercial bank-expected annual yield = 1%. â€¢ High-growth common stocks – expected annual increase in market value = 6%; expected dividend yield = 0. 1. Calculate the after-tax yields on the foregoing investments, assuming the Brittens have a 28% marginal tax rate (based on Public Law 108-27, The Jobs and Growth Tax Relief Reconciliation Act of 2003). 2. How would you recommend the Brittens invest their \$40,000? Explain your answer. SHOW ALL WORK FOR EACH ASSIGNMENT AND EXPLAIN EACH STEP CAREFULLY Introduction It is true that every investor wants high returns on less investment. The return of investment gets affected by several factors. An investor always tries to find answer of whether he should invest or not. Bernie and Pam Britten is a young couple. The earning of them is \$100000. They want to invest \$40000. They are very conscious regarding liquidity of position of investment, risk in investment and return of investment. They want to earn more return with less investment. It is common thinking of investors. Post Tax Return Steps for Calculating the Post Return Investment â€¢ The rate of Marginal Tax is 28% (CCH Incorporated, 2003). â€¢ Calculation of after tax return on investment After Tax Return = Return*(1-tax). â€¢ Thus, the Post tax return on investment is calculated as ï‚§ Condominium: Pre tax return: 2% After Tax Return: 2% ï‚§ Municipal Bond: Pre- tax return on Bond : 3% (Investing in Municipal Bonds,2009) After Tax Return: 3% because return on Bond is tax free. ï‚§ High Yield Corporate Stock : Pre- Tax Return 8% After Tax Return: 5 %*( 1-.28)= 3.60% ï‚§ Savings Account Interest: Pre- Tax Return 3% After Tax Return: 1*(1-.28) = .72% ï‚§ High Yield Growth Stock: Pre Tax Return 10% After Tax Return: 6 %*( 1-.28) = 4.32% Assumptions: â€¢ The capital gain on Condominium and return on Municipal Bonds are tax free. The property is used for primary residence. â€¢ Capital Gain and Dividend yield on Share, interest income are taxable. Proposal for Investments Pam and Bernie Britten want to invest \$40000 in one of given Investment. They can invest in any below mentioned investment avenue: â€¢ Condominium: the post return of it is 2%. It is moderate risk Investment Avenue. â€¢ Municipal Bond: the post return is 3%. It is risk free. â€¢ Corporate Shares: the after tax return on shares is 3.60%. There is high risk. â€¢ Saving Amount: it will give .72% after tax return. There is no risk. â€¢ Growth stocks: it will earn 4.32% after tax return. There is high risk. As we discussed that they have five investment options. If they want get high return on their fund, they should go for High Yield Growth Stock and Corporate Stock but both options have high risk. If they are risk lover person, they must invest in shares. On the other hand, if they are not ready to incur risk, they should go for other options. In other options, there are Municipal Bond, Saving Account and Condominium. The after tax return on Municipal Bond is greater than saving account, so they should make investment in Municipal Bond over the saving account. There is not any risk in case of the municipal bond investment. As a rational investo

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