A&Z Inc. averages $4 million taxable income a year. Because it needs an infusion of cash, the

Question:

A&Z Inc. averages $4 million taxable income a year. Because it needs an infusion of cash, the board of directors is considering two options: selling a new issue of preferred stock to the public for a total offering price of $500,000 or borrowing $500,000 from a local bank. The market rate on preferred stock is only 5.6 percent, while the bank’s interest rate is 9 percent. Which option minimizes the after-tax cost of the new capital?
Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...