Plowman Industries Can Issue a 25-Year, 8

question 8

Multiple Choice

Plowman Industries can issue a 25-year, 8.1% 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?

• A) 6.66%
• B) 6.99%
• C) 7.34%
• D) 7.71%
• E) 8.09%

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