Assume that Shavonne's marginal tax rate is 37 percent and her tax rate on dividends is 15 percent. If a corporate bond pays 6.2 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

To be indifferent, the after-tax yield from both investments should be equal. The after-tax yield from the bond is 6.2% * (1 - 0.37) = 3.906%. For the stock, the after-tax yield is the dividend yield * (1 - 0.15). Setting these equal gives: dividend yield * 0.85 = 3.906%, so dividend yield = 3.906% / 0.85 = 4.6%.

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