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12 April, 23:30

Assume that Lucas's marginal tax rate is 32 percent and his tax rate on dividends is 15 percent. If a dividend-paying stock (with no growth potential) pays an 8 percent 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?

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  1. 13 April, 01:35
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    6.8%

    Explanation:

    Data provided in the question:

    Marginal tax rate = 32%

    Tax rate on dividends = 15%

    Dividend yield = 8%

    Now,

    Interest rate municipal bond will offer

    = Dividend yield * (1 - Tax rate on dividend)

    or

    Interest rate = 8% * (1 - 15%)

    or

    Interest rate = 8% * (1 - 0.15)

    Interest rate = 8% * 0.85

    Interest rate = 6.8%
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