Question

Assume that Keisha's marginal tax rate is 37 percent and her tax rate on dividends is 20 percent. If a city of Atlanta bond pays 8.48 percent 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?

		None of the choices are correct.
		20.00 percent
		10.60 percent
		11.60 percent
		8.48 percent

Answer 1

Calculate dividend yield as follows:

Dividend yield * (1 - tax rate) = Interest

Dividend yield * (1 - 0.20) = 8.48%

Dividend yield = 8.48%/0.80

Dividend yield = 10.60%

Thus, correct answer is c.