Question

Assume that Juanita is indifferent between investing in a corporate bond that pays 12.00 percent interest and a stock with no growth potential that pays a 8.10 percent dividend yield. Assume that the tax rate on dividends is 15 percent. What is Juanita's marginal tax rate?

Answer 1

Juanita's marginal tax rate is 42.5%

Step-by-step explanation:

marginal tax rate = MTR

After tax yield of dividend paying stock is 8.1% * (1-0.15) = 0.069 = 6.9%

The after tax yield of the bond will be 6.9%

Therefore,

6.9% = 12.0% * (1 - MTR)

6.9% = 12.0% - 12.0% *MTR

6.9% - 12.0% = -12.0% * MTR

-0.051 = -0.12*MTR

MTR = 0.051/0.12 = 0.425

MTR = 42.5%