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its investment bankers have told the company that it can issue a 25-yr, 8.1% annual paymen

its investment bankers have told the company that it can issue a 25-yr, 8.1% annual paymen

its investment bankers have told the company that it can issue a 25-yr, 8.1% annual payment bond at par. They can also sell an issue of annual payment preferred stock to corporate investors who are in the 40% tax bracket. The investors require an after tax return on the bonds by 1% which would represent an after tax risk premium. What coupon rate must be set on the preferred in order to issue it at par. hint: portion of dividends are tax -exempt for corporate investors. Please explain your anwer.=(annual coupon payment+risk premium)-(annual coupon*(0.7-0.4)) =(8.1+1)-(8.1%*0.3)=6.67% Where is the .7 coming from?

Abhinav 04-Dec-2019

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