Assume that Shavonne's marginal tax rate is 37 percent and her tax rate on dividends is 15 percent. If a corporate bond pays 10.20 percent 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 from a cash-flow perspective?

Question

Quizplus · Accepted Answer

Shavonne's after-tax return on the corporate bond would be (1-0.37) x 10.20% = 6.43%. Therefore, the dividend yield on the stock would have to be 6.43% in order for her to be indifferent between the two investments. However, since the tax rate on dividends is only 15%, the stock would only need to offer a dividend yield of 6.43% / (1-0.15) = 7.56% for Shavonne to be indifferent. Therefore, the best choice is B.

Assume That Shavonne's Marginal Tax Rate Is 37 Percent and Her