Question

Its investment bankers have told Trickee Corporation that it can issue a 20-year, 8.3% 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? Show your calculations, if any, and explain your answer.

Answer 1

20% years of it 8.3 is the return