Question

Assume that Lucas' marginal tax rate is 10% and his tax rate on dividends is 5%. If a dividend-paying stock (with no growth potential) pays an 6.40% dividend yield, what interest rate would a municipal bond have to offer for Lucas to be indifferent between the two investments from a cash-flow perspective?

Answer 1

Answer:6.08%

Explanation:

Assuming that Lucas' marginal tax rate is 10% and his tax rate on dividends is 5% .If a dividend-paying stock (with no growth potential) pays an 6.40 dividend yield . The interest rate that a municipal bond have to offer for Lucas

Is

6.4% × (1 − .05) = 0,0608

Therefore 6.08%