Assume that Jose is indifferent between investing in a corporate bond that pays 10% interest and a stock with no growth potential that pays an 8% dividend yield. Assume that the tax rate on dividends is 15%. What is Jose's marginal tax rate?
15%
To determine Jose's marginal tax rate, we need to compare the after-tax return of the corporate bond and the stock. Let's calculate both.
For the corporate bond paying 10% interest, there is no tax on interest income. So Jose will earn the full 10% return.
For the stock paying an 8% dividend yield, we need to consider that Jose will be subject to a 15% tax rate on dividends. To find the after-tax return, we need to calculate (1 - 15%) * 8%, which equals 0.85 * 0.08 = 0.068, or 6.8%.
Now, since Jose is indifferent between the two investments, it means that the after-tax returns are equal. Therefore, the marginal tax rate must be such that the after-tax return of the stock is equal to the 10% return of the corporate bond.
Let T be the marginal tax rate. Using the equation: (1 - T) * 0.08 = 0.1, we can solve for T.
0.08 - T * 0.08 = 0.1
0.08 - 0.08T = 0.1
-0.08T = 0.1 - 0.08
-0.08T = 0.02
T = 0.02 / -0.08
T = -0.25
Since a negative tax rate doesn't make sense, it seems there's an error in the problem setup or calculations. Please re-evaluate the question or verify the given information.