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Sagot :
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
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