Mariano Manufacturing Can Issue a 25-Year, 8

question 24

Multiple Choice

Mariano Manufacturing can issue a 25-year, 8.1% annual payment bond at par Its investment bankers also 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:

Perpetuity

A type of annuity that pays an infinite series of cash flows, with no end date.

Duration

Duration measures a bond's sensitivity to interest rate changes, representing the weighted average time until a bond's cash flows are paid to the investor.

Annual Pay

The total monetary compensation an employee receives from their employer in a one-year period, including all forms of salary, bonuses, and other financial benefits.

Asset Portfolios

Collections of various types of investments held by individuals or institutions to diversify risk and achieve financial goals.