Question

Assume that Juanita is indifferent between investing in a corporate bond that pays 11.60 percent interest and a stock with no growth potential that pays a 7.90 percent dividend yield. Assume that the tax rate on dividends is 15 percent. What is Juanita's marginal tax rate?(Do not round intermediate computations.)

		21.73 percent
		42.11 percent
		None of the choices are correct.
		10.87 percent
		31.92 percent

Answer 1

After-tax yield of dividend paying stock is = (Dividend yield*(1-Tax rate)) After-tax yield of dividend-paying stock is = (7.90%*(1-0.15)) After-tax yield of dividend-paying stock is = 6.715% The after-tax yield of the bond must be = 6.715% Therefore 6.715%=11.60%*(1-marginal tax rate) 0.06715=0.1160*(1-Marginal tax rate) (1-Marginal tax rate)=(0.06715/0.1160) (1-Marginal tax rate)=0.57887931 Marginal tax rate = 1-0.57887931 Marginal tax rate = 0.421121 Marginal tax rate = 42.11 percent