Mariano Manufacturing can issue a 25-year, 8.1% annual payment bond at par. Its investment bankers also stated that the company can…
Mariano Manufacturing can issue a 25-year, 8.1% annual payment bond at par. Its investment
bankers also stated that the company can sell an issue of annual payment preferred stock to
corporate investors who are in the 40% tax bracket. The corporate investors require an after-tax
return on the preferred that exceeds their after-tax return on the bonds by 1.0%, which would
represent an after-tax risk premium. What coupon rate must be set on the preferred in order to
issue it at par?
a. 6.66%
b. 6.99%
c. 7.34%
d. 7.71%
e. 8.09%
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