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 dividend 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?
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