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10 February, 02:20

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?

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  1. 10 February, 03:06
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    Juanita's marginal tax rate is 42.5%

    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%
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