Answered

Welcome to Westonci.ca, where you can find answers to all your questions from a community of experienced professionals. Experience the ease of finding precise answers to your questions from a knowledgeable community of experts. Get precise and detailed answers to your questions from a knowledgeable community of experts on our Q&A platform.

Its investment bankers have told Donner Corporation that it can issue a 25-year, 8.1% annual payment bond at par. They 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? (hint: a portion of dividends are tax-exempt for corporate investors).

Sagot :

Parrain

The coupon rate must be set at 9.77%

The after-tax return on the bonds is:

= Annual payment rate * ( 1 - tax rate)

= 8.1% * ( 1 - 40%)

= 4.86%

The investors would like an after-tax return on preferred stock that is more than their bond return by 1% so they would like a preferred return of:

= 4.86% + 1%

= 5.86%

If the Preferred must be issued at par, its coupon rate must be equal its before-tax yield:

= After tax yield / ( 1 - tax rate)

= 5.86% / ( 1 - 40%)

= 9.77%

More on this type of question can be found at https://brainly.com/question/17126608

sivajegamiruthu

Answer:

9.77 is the correct answer

i think this helps u

Thank you for your visit. We're committed to providing you with the best information available. Return anytime for more. We appreciate your time. Please revisit us for more reliable answers to any questions you may have. Your questions are important to us at Westonci.ca. Visit again for expert answers and reliable information.