Abbot Corporation is a real estate developer looking to build a new property in the Metro Vancouver area. In order to do so, they need to raise capital to finance the construction. The company has investigated two alternatives:
1. Issue $95 million 10-year bonds, with an 8% coupon per annum. The company can buy them back on the open market at the end of 5 years; analysts estimate that it would cost $103,000,000 to reacquire the $95 million dollar issue. The market rate is 6.5%.
2. Issue $95 million of preferred shares at par. The shares can be redeemed at the company’s option at the end of 5 years for a price estimated to be in the region of $100,000,000. Annual (cumulative) dividends are set at 6.75%.

Required:
1. Provide journal entries to record issuance, annual dividends, or interest (for one year only) of both the shares and debt.
2. Assume Abbot’s tax rate is 30%. What is the after-tax annual cost of the various alternatives?
3. Management is inclined to pick the preferred share option, since the annual interest rate is lower. Prepare a response that considers the different interest rates as well as the impact on the balance sheet.