Assume that Will's marginal tax rate is 32% and his tax rate on dividends is 15%. If a dividend-paying stock (with no growth potential) pays a dividend yield of 8%, what interest rate must the corporate bond offer for Will to be indifferent between the two investments from a cash-flow perspective?

Question

Quizplus · Accepted Answer

After-tax yield of the dividend-paying stock is 8% × (1 − 0.15) = 6.80%; The after-tax yield of the corporate bond must be 6.80%. Therefore, 6.80% = Yield × (1 − 0.32) and Yield = 10%

Assume That Will's Marginal Tax Rate Is 32% and His