Question

Assume that Juanita is indifferent between investing in a corporate bond that pays 10.20 percent interest and a stock with no growth potential that pays a 6 percent dividend yield. Assume that the tax rate on dividends is 15 percent. What is Juanita's marginal tax rate?

Answer 1

After tax dividend yield = 10.2% * (1- marginal tax rate)

After tax dividend yield = 6% * 85% = 5.1%

5.1% = 10.2% * (1-marginal tax rate)

Marginal tax rate = 10.2% / 5.1%

= 50%