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 8.6 percent dividend yield. Assume that the tax rate on dividends is 15 percent. What is Jose's marginal tax rate? (Do not round intermediate computations.)
A)41.96 percent
B)32.02 percent
C)26.90 percent
D)9)72 percent
E)None of the choices are correct.

Question

Quizplus · Accepted Answer

Jose is indifferent between investing in a corporate bond that pays 10 percent interest and a stock with no growth potential that pays an 8.6 percent dividend yield. Therefore, the after-tax return on the stock must be equal to or greater than the return on the bond. 
The after-tax return on the stock is (1 - 0.15) * 0.086 = 0.0731 or 7.31%. 
Since Jose is indifferent between the two, the marginal tax rate must be equal to the difference between the before-tax return on the bond (10%) and the after-tax return on the stock (7.31%), divided by the before-tax return on the bond (10%). 
Marginal tax rate = (10% - 7.31%) / 10% = 0.269 or 26.9%. Therefore, the answer is C.

Assume That Jose Is Indifferent Between Investing in a Corporate