Apparel, Inc., could sell preferred stock with a dividend cost of 12 percent.
If it were to sell bonds in the current market, the interest rate cost would be
14 percent. The company is in a 40 percent tax bracket.
a. What is
the after-tax cost of each of these methods of financing?
Milk Biscuits, Inc., holds a limited number of preferred stocks as investments.
It is in a 40 percent tax bracket. If it were to invest in the preferred stock
of Alvarez Apparel, what would be its after-tax return? What would be its
after-tax return if it were to invest in the bonds?
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