Assume that Shavonne's marginal tax rate is 50% and her tax rate on dividends is 15%. If a corporate bond pays 10.20% 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

After-tax yield of the corporate bond is 10.20% × (1 − 0.50) = 5.10%; The after tax yield of the dividend paying stock must be 5.10%. Therefore, 5.10% = Yield × (1 − 0.15) and Yield = 6%

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