Description of this paper

The bonds your company just issued carry a yield to maturity of 9%

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solution


Question

The bonds your company just issued carry a yield to maturity of 9%, and you have preferred stock outstanding which pays a 7% dividend yield. Your company has a tax rate of 33%. The president of your company has just suggested to you that you issue more preferred stock and buy back your bonds. What should you tell her?;a.;Good idea. Since the after-tax cost of debt is lower than the after-tax cost of the preferred, your cost of capital will go down by using more preferred.;b.;Bad idea. Since the after-tax cost of debt is lower than the after-tax cost of the preferred, your cost of capital will go down by using more preferred.;c.;Bad idea. Since the cost of preferred is lower than the cost of the debt, your cost of capital will go down by using more preferred.;d.;Good idea. Since the cost of preferred is lower than the cost of the debt, your cost of capital will go down by using more preferred.;e.;Bad idea. Since the after-tax cost of debt is lower than the after-tax cost of the preferred, your cost of capital will go up by using more preferred.

 

Paper#20970 | Written in 18-Jul-2015

Price : $17
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