The O’Hare Corporation is trying to decide whether to raise additional capital of $100 million through a new issue of 9% long-term debt or of 6% preferred stock. The income tax rate is 40%. Compute net income less preferred dividends for these alternatives. Assume income before interest expense and taxes is $20 million. Show all dollar amounts in thousands. What is the after-tax cost of capital for debt and for preferred stock expressed in percentages? Comment on the comparison. Compute the interest-coverage ratio for the first year.
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