Assume that Jose is indifferent between investing in a corporate bond that pays 10 percent interest and a stock with no growth potential that pays an 8 percent dividend yield. Assume that the tax rate on dividends is 15 percent. What is Jose's marginal tax rate?
A)47 percent
B)37 percent
C)32 percent
D)15 percent
E)None of the choices are correct.

Question

Quizplus · Accepted Answer

The correct answer is C because the marginal tax rate is the rate at which the last dollar of income is taxed. In this case, Jose is indifferent between investing in a corporate bond that pays 10 percent interest and a stock with no growth potential that pays an 8 percent dividend yield. This means that the after-tax return on the stock is 8 percent * (1 - 15%) = 6.8 percent. The after-tax return on the bond is 10 percent * (1 - 32%) = 6.8 percent. Therefore, Jose's marginal tax rate is 32%.

Assume That Jose Is Indifferent Between Investing in a Corporate