Assume that Keisha's marginal tax rate is 40% and her tax rate on dividends is 15%.If a city of Atlanta bond pays 7.65% interest,what dividend yield would a dividend-paying stock (with no growth potential)have to offer for Keisha to be indifferent between the two investments from a cash-flow perspective?

Question

Quizplus · Accepted Answer

To be indifferent, the after-tax yield on the stock should equal the tax-free yield on the bond. The bond's yield is 7.65%. The stock's after-tax yield is the dividend yield times (1 - 0.15). Solving 0.85 * dividend yield = 7.65% gives a dividend yield of 9%.

Assume That Keisha's Marginal Tax Rate Is 40% and Her