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

From Keisha's perspective, the after-tax yield of the bond is:

(1 - 0.4) x 0.0765 = 0.0459 = 4.59%

For Keisha to be indifferent between the bond and the dividend-paying stock, the after-tax yield of the dividend-paying stock would have to be:

0.0765 x (1 - 0.15) / (1 - 0.4) = 0.09 = 9%

Therefore, the dividend yield would have to be 9% for Keisha to be indifferent between the two investments from a cash-flow perspective.

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