Archive for the ‘HOT – Homa Online Tutorial’ Category

HOT: If capital gains tax rates go up 8.8%, how much will after-tax capital gains ROIs go down?

October 16, 2012

Here’s another HOT: Homa Online Tutorial …

Well, Obama says he’ll jack capital gains tax rates from 15% to 20% … and ObamaCare has a 3.8 non-payroll payroll tax on investment income starting in 2013.

So, if Obama is elected and he keeps his promise … the effective capital gains tax rate goes from 15% to 23.8% … a delta of 8.8%.

That 8.8% tax rate increase will cut after-tax capital gains ROIs.

By how much?

Answer: The pre-tax ROI times 8.8%.

In other words, the answer depends on the proportion of a stock’s value that is unrealized capital gains.

The answer isn’t intuitive and the math is a bit hairy, so let’s run thru an example ….

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Scenario 1 – CG Tax = 15%

Assume that you bought a stock for $750 and sold it for $1,000 … netting a $250 pre-tax gain.

The pre-tax ROI is 33% … $250 divided by $750.

If the capital gains tax is 15%, you pay $37.50 in taxes … netting you, after taxes, $212.50.

The after-tax ROI is 28.3% … $212.50 divided by $750.

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Scenario 2 – CG Tax = 23.8%

Again assume that you bought a stock for $750 and sold it for $1,000 … netting a $250 pre-tax gain.

The pre-tax ROI is still 33% … $250 divided by $750.

If the capital gains tax is 23.8%, you pay $59.50 in taxes … netting you, after taxes, $190.50.

The after-tax ROI is 25.4% … $190.50 divided by $750.

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The Difference

The CG-ROI @15% is 28.3%, where CG-ROI @ 15% is the Capital Gains ROI at a 15% Tax Rate.

The CG-ROI @23.8% is 25.4%, where CG-ROI @ 23.8% is the Capital Gains ROI at a 23.8% Tax Rate

The difference is 2.9% … that is, the CG-ROI dropped by 2.9 percentage points.

Note that 2.9% is equal to the pre-tax ROI (33%) times the difference in the tax rates (8.8%)

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The generalizable answer

By math magic, the difference in after tax ROIs  are always equal to the pre-tax ROI (which varies depending on the relationship between a stock’s unrealized capital gains and its cost basis) times the difference in the tax rates (in this case, the 8.8% difference between  15% and 23.8%).

If you’re interested, click to view the math work …  if you’re not, skip to the table below.

Here’s a handy look-up table.

UR-CG are unrealized capital gains as a percentage of current stock market value.

In the above example, UR-CG equals 25% … $250 pre-tax capital gains divided by stock’s current market value $1,000 … and there’s a 2.9 percentage point drop in ROI.

As you’d expected, the greater the percentage of capital gains embedded in a stock, the greater the ROI hit if marginal tax rates go up.

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So what?

I don’t give investment advice, but the numbers say that if you expect Obama to be re-elected … and if you expect him to keep his promise and jack up capital gains tax rates … and you have stocks with a high proportion of embedded capital gains … you should probably consider selling.

Technical tax note: Wash sales rules don’t apply to stocks sold at a gain … that is, you can sell them pay the capital gains taxes and immediately buy them back at a stepped-up basis (i.e. the current market price).

In a subsequent post I’ll work thru the math re: whether that makes sense.

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HOT: If capital gains tax rates go up 8.8%, how much will after-tax capital gains go down?

October 15, 2012

Another HOT: Homa Online Tutorial

This is a relatively simple financial math question that most people I’ve asked have gotten wrong.

Answers have ranged from less than 8.8% – since only capital gains are being taxed (huh?) … 8.8% – because that’s how much the marginal rate is going up … to more than 8.8% – “otherwise you wouldn’t be asking the question”.

First, what’s magic about 8.8%?

Well, Obama says he’ll jack capital gains tax  rates from 15% to 20% … and ObamaCare has a 3.8 non-payroll payroll tax on investment income starting in 2013.

So, if Obama is elected and he keeps his promise … the effective capital gains tax rate goes from 15% to 23.8% … a delta of 8.8%.

That 8.8% increase will cut after-tax capital gains by 10.35% !

OK, let’s run thru the math.

click for the Homa Online Tutorial
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Recap

Assume that you bought a stock for $750 and sold it for $1,000 … netting a $250 pre-tax gain.

If the capital gains tax is 15%, you pay $37.50 in taxes … netting you, after taxes, $212.50.

If the capital gains tax is 23.8%, you pay $59.50 in taxes … netting you, after taxes, $190.50.

The difference, is $22 ($212.50 less $190.50 … or simply, 8.8% times $250).

So the percentage drop in after-tax net gains is 10.35% ($22 divided by $212.50)

Note that that percentage stays constant at 10.35% regardless of the size of the gain —  in absolute or relative to proportionate cost basis.

That’s not a coincidence, it’s math.

With a capital gains tax rate of 15%, the after tax gain is simply 1 minus the tax rate times the nominal gain … 1 minus 15% is 85%.

With a capital gains tax rate of 23.8%, the after tax gain is simply 1 minus that tax rate times the nominal gain … 1 minus 23.8% is 76.2%.

The difference is still 8.8%, but the denominator of the change ratio is is 85%, not 100% … and, 8.8% divided by 85% is 10.35%.

Again, that answer is generalizable … not specific to this example.

Q.E.D.

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Advanced Financial Math Question

How much will after-tax ROI go down if capital gains tax rates are increased by 8.8%?

Hint: The math is more complicated than the above example, because the answer depends on the cost basis of the stock relative to its current market value.

I’ll give the answer is a later post.

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HOT – Can problem-solving be learned?

September 27, 2012

Here’s an encore HOT – Homa Online Tutorial – straight from the classroom to you via the HomaFiles.

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I sometimes get asked: Can problem-solving be learned or is hardwired into people’s DNA?

My view: DNA can help (e.g. raw brainpower can help) but “ordinary” folks can become adept problem-solvers.

How?

By internalizing models  i.e. simplifying frameworks) and protocols (i.e. analytical methods) … and applying them in a variety of contexts.

In doing so, the “devices” can be stored sub-consciously and retrieved consciously to solve problems.

That’s called intuition.

click to view

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HOT: Why marketing is important (and cool) … and, certainly not dead !

September 20, 2012

Earlier this week, we posted the HBR article claiming that “Marketing is Dead”.

Fact is, many folks think that marketing is nothing more than a bunch of b.s. being dished by shysters.

And, some folks (think finance majors) regard marketing as unchallenging & touchy-feely … a discipline for folks who can’t cut it in finance.

Au contraire, mes amies.

This week at the annual Marketing 101 session for 1st year MBAs, I tried to convey that marketing plays a central role in most companies, is highly analytical, and – done right – is harder than it looks.

From the HomaFiles archives, here’s the HOT (Homa Online Tutorial) that pitches the case.

click to view
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HOT: Why is marketing important (and cool)?

January 5, 2012

Responding to MSB alums, before the holidays, I posted the first HOT:  Homa Online Tutorial – material right out of the classroom to you via the HomaFiles.

Since I’ve gotten some positive feedback, here’s another HOT topic … the relevance and importance of marketing.

Fact is, many folks think that marketing is nothing more than a bunch of b.s. being dished by shysters.

And, some folks (think finance majors)  regard marketing as unchallenging & touchy-feely … a discipline for folks who can’t cut it in finance.

Au contraire, mes amies.

In this session, I try to convey that marketing plays a central role in most companies, is highly analytical,  and – done right – is harder than it looks.

   click to view
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HOT: The 4 Stages Strategic Thinking

December 16, 2011

I’ve gotten a couple of requests from alums to post some of the material that I’m now pitching to current classes.

So today, I’m posting the first HOT – Homa Online Tutorial – something right out of the classroom to you via the HomaFiles.

Some stuff will be classic, some will be edgy; some will be original, some will be “borrowed” from other sources (with proper attribution of course).

Here’s the first HOT topic …

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Great Strategy

In my Advanced Marketing Strategy introduction, I tell students that the course goal is to get them to “internalize a mindset geared to creating great marketing strategies.”

That raises a logical question: what’s a “great” strategy … as opposed to a “good” strategy.

I try to put “great” in the context of the 4 stages strategic thinking.

click for the online tutorial “The 4 Stages of Strategic Thinking” (4:30 min)

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Synopsis: The 4 Stages of Strategic Thinking

Companies can be at one of 4 levels of strategic thinking.

Level 1 is “reactionary” … responding to market and forces as they happen … hoping to make it through this day and see the sun come up tomorrow … and rejoicing when it does (think, my dog Captain)

Level 2 is “remedial” … proactively stop doing dumb stuff … and try doing mostly the same things, just a bit better … often by benchmarking companies with best practices and trying to emulate them. Consultants make mucho $$$ on these folks … taking the #3 company in an industry and telling them to be like #1 … in hopes of overtaking #2.

Level 3 is “resourceful” … think typical MBA training … analyze SWOTs, assess competitive advantages, find “white spaces” or “blue oceans” … basically fit the existing world and play by the rules.

Level 4 is “revolutionary” … try to change the way the game is played … alter the rules of the business to your company’s unique advantage … think, FedEx, early Netflix or Apple iPad … don’t just report the weather, create it.

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