Assume that Shavonne's marginal tax rate is 50% and her tax rate on dividends is 15%.If a corporate bond pays 10.2% interest,what dividend yield would a dividend-paying stock (with no growth potential)have to offer for Shavonne to be indifferent between the two investments from a cash-flow perspective?

Question

Quizplus · Accepted Answer

The dividend yield would have to be 6% for Shavonne to be indifferent between the two investments from a cash-flow perspective. This is because the after-tax return on the corporate bond is 5.1% (10.2% * (1 - 50%)), and the after-tax return on the dividend-paying stock would also need to be 5.1% for Shavonne to be indifferent. To achieve this, the dividend yield would need to be 6% (5.1% / (1 - 15%)).

Assume That Shavonne's Marginal Tax Rate Is 50% and Her