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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Definitions:

Purchases

Transactions involving the buying of goods or services for the purpose of resale or direct use in production or operations.

Free Cash Flow

The amount of cash generated by a business after accounting for capital expenditures such as buildings or equipment, indicating the company's ability to generate additional revenues.

Capital Expenditures

Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment to improve its long-term operations and growth.

Cash Dividends

A portion of a company's earnings distributed to shareholders in the form of cash.