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11111nata11111 [884]
2 years ago
5

Mariano Manufacturing can issue a 25-year, 8.8% 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 25% 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
Business
1 answer:
aivan3 [116]2 years ago
4 0

Answer: 10.13%

Explanation:

The after-tax return on the preferred shares would be:

= After-tax return + Premium required

= (8.8% * (1 - 25%)) + 1%

= 7.6%

For the preferred stock to be issued at par with the above after tax return:

= After tax return / ( 1 - tax)

= 7.6% ( 1 - 25%)

= 10.13%

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