Business, 06.05.2020 06:01 gonsalex6688

Garnet Corporation is considering issuing risk-free debt, or risk-free preferred stock. The tax rate on interest income is 35%, and the tax rate on dividends or capital gains from preferred stock is 15%. However, the dividends on preferred stock are not deductible for corporate tax purposes, and the corporate tax rate is 40%.

a. If the risk-free interest rate for debt is 6%, what is cost of capital for risk-free preferred stock?
b. What is the after-tax debt cost of capital for the firm? Which security is cheaper for the firm?
c. Show that the after-tax debt cost of capital is equal to the preferred stock cost of capital multiplied by (1 −τ*).

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Garnet Corporation is considering issuing risk-free debt, or risk-free preferred stock. The tax rate...

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