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

Question

Quizplus · Accepted Answer

After-tax yield of dividend-paying stock is 8% × (1 − 0.15) = 6.80%; The after-tax yield of the bond must be 6.80%. Therefore, 6.80% = 10% × (1 − mtr) and mtr = 32%

Assume That Jose Is Indifferent Between Investing in a Corporate