Assume that Juanita is indifferent between investing in a corporate bond that pays 8.20 percent interest and a stock with no growth potential that pays a 6.20 percent dividend yield. Assume that the tax rate on dividends is 15 percent. What is Juanita's marginal tax rate?(Do not round intermediate computations.)
A)35.73 percent
B)25.71 percent
C)15.69 percent
D)7)85 percent
E)None of the choices are correct.

Question

Quizplus · Accepted Answer

Juanita is indifferent between earning 8.20% from a bond (which is fully taxed) and earning 6.20% from a dividend (which is taxed at 15%). To find her marginal tax rate, we need to adjust the dividend yield to its after-tax equivalent and set it equal to the bond yield. The after-tax yield of the dividend is 6.20% * (1 - 0.15) = 5.27%. To make 5.27% equivalent to 8.20%, we solve for the tax rate (t) in the equation 8.20% * (1 - t) = 5.27%. Solving for t gives us a marginal tax rate of approximately 35.73%.

Assume That Juanita Is Indifferent Between Investing in a Corporate