Assume that Shavonne's marginal tax rate is 50% and her tax rate on dividends is 15%.If a corporate bond pays 10.20% 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

To be indifferent, the after-tax return on both investments should be equal. The after-tax return on the bond is 10.20% * (1 - 0.50) = 5.10%. For the stock, the after-tax return is the dividend yield * (1 - 0.15). Setting these equal gives: dividend yield * 0.85 = 5.10%, so dividend yield = 5.10% / 0.85 = 6.00%.

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