Assume that Jose is indifferent between investing in a corporate bond that pays 10% interest and a stock with no growth potential that pays an 8% dividend yield. Assume that the tax rate on dividends is 15%. What is Jose's marginal tax rate?
A) 47%
B) 37%
C) 32%
D) 15%
E) None of these

Question

Quizplus · Accepted Answer

Jose is indifferent between the two investments, meaning the after-tax return on the bond equals the after-tax return on the stock. The after-tax return on the bond is 10% * (1 - marginal tax rate). The after-tax return on the stock is 8% * (1 - 0.15). Setting these equal gives 10% * (1 - marginal tax rate) = 8% * 0.85. Solving for the marginal tax rate gives 32%.

Assume That Jose Is Indifferent Between Investing in a Corporate