Patel holds a portfolio of securities valued at approximately EUR4 million with a cost basis of EUR1 million. Patel expects an annual pretax capital gains return of 6.5% per year on his securities portfolio. The capital gains tax rate is 20%. The portfolio primarily contains dividend-paying stocks and interest-bearing bonds, and the yield on the portfolio is 2%. Both stock dividend and bond interest are taxed annually at a rate of 40%. In the past, Patel has reinvested all these distributions back into his portfolio but anticipates that after retirement he may need to use some of the distributions to fund his expenses.
Additionally, Patel plans to buy a vacation home to enjoy his early retirement years and expects to hold the home for 10 years. His budget for the vacation home is approximately EUR1.7 million. He expects an 8% annual pretax appreciation in the value of his vacation home and expects to pay capital gains tax of 20% on the sale of this vacation home. Patel is considering selling half of his securities portfolio to fund the vacation home purchase.
Determine whether Patel should sell half of his securities portfolio to buy the vacation home.
Solution
To determine whether Patel should sell the securities, an analysis can be done to compare the expected after-tax value of the home purchase and the expected after-tax value of the securities portfolio at the end of the 10-year time horizon. To avoid additional complexity, the analysis may initially avoid considering the cash distributions of the securities portfolio
我的疑问：标准回答中的红色字，这也可以？直接无视2%的利息和股息收入计算就是为了简化？实际考试应该怎么做？要把利息2%收入的annual tax也代入计算对吧