1. Sarah Short has owned 1,000 shares of Facebook Corporation since January 2, 2016. She paid $4,000 for the stock and the shares are currently selling for $10,000 on October 31, 2016. One week ago, the shares were selling for $10,300 and she had hoped to hold the stock for three more months in order to obtain long-term capital gain treatment. However the recent dip has troubled her, and she wonders if she should sell the stock now to lock in the gain, albeit a short-term capital gain.
If Sarah's marginal tax rate is 28%, what advice could you give to help Sarah make this decision? What price could the stock fall to and still yield Sarah what she would earn today? Explain your answer and show all computations. Ignore present value implications. Ignore the 3.8% Medicare surtax on net investment income.
2. Earl wants to invest $7,000 in a tax-exempt bond yielding 4% which matures in 15 years. He also wants to consider a corporate taxable bond. What interest rate must the corporate bond have to make its after-tax yield equivalent to the tax-exempt bond? Assume Earl is in the 33% marginal tax bracket
3. Greg Jones lives in Arlington, Texas and has the opportunity to rent his home for the 2016 Final Four Games. He will rent his home for only five days. Deductible rental expenses will be about $150 per day. These expenses will include utilities, depreciation on the rental space, and other accommodation expenses. Greg has never rented out his home previously and does not intend to rent it out again. Greg is in the 33% marginal tax bracket.
Greg wants at least a 15% return on his expenditures. How much should he rent the space for? Explain your answer and show all computations.