Currently we own 100 shares each of stocks 1 through 10. The original price we paid for these stocks, todayÃ¢â¬â¢s price, and the expected price in one year for each stock is shown in Table 76.
We need money today and are going to sell some of our stocks. The tax rate on capital gains is 30%. If we sell 50 shares of stock 1, then we must pay tax of .3, 50(30 – 20) = $150. We must also pay transaction costs of 1% on each transaction. Thus, our sale of 50 shares of stock 1 would incur transaction costs of .01. 50. 30 = $15. After taxes and transaction costs, we must be left with $30,000 from our stock sales. Our goal is to maximize the expected (before-tax) value in one year of our remaining stock. What stocks should we sell? Assume it is all right to sell a fractional share of stock.
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