Assume that Shavonne's marginal tax rate is 50% and her tax rate on dividends is 15%. If a corporate bond pays 10.2% interest, what dividend yield would a dividend-paying stock (with no growth potential) have to offer for Shavonne to be indifferent between the two investments?

Question

Quizplus · Accepted Answer

The after-tax return on the corporate bond is 10.2% * (1 - 50%) = 5.1%. The after-tax return on the dividend-paying stock is the dividend yield * (1 - 15%). For Shavonne to be indifferent between the two investments, the dividend yield must be 5.1% / (1 - 15%) = 6%.

Assume That Shavonne's Marginal Tax Rate Is 50% and Her