Assume that Lucas' marginal tax rate is 30% and his tax rate on dividends is 15%.If a dividend-paying stock (with no growth potential)pays an 8% dividend yield,what interest rate would a municipal bond have to offer for Lucas to be indifferent between the two investments from a cash-flow perspective?

Question

Quizplus · Accepted Answer

Lucas' after-tax return on the dividend-paying stock is (1-0.15) × 8% = 6.8%, while the after-tax return on the municipal bond would be the same as the pre-tax yield since it is tax-free. Therefore, Lucas would be indifferent between the two investments if the municipal bond had a 6.8% yield.

Assume That Lucas' Marginal Tax Rate Is 30% and His