The Barnard Corporation needs additional cash to improve its facilities. It can borrow $2,000,000 from a bank

Question:

The Barnard needs additional cash to improve its facilities. It can borrow $2,000,000 from a bank at 9 percent interest for 10 years, with a balloon payment of the entire principal at the end of the 10-year period. It can issue $2,000,000 in 10-year corporate bonds paying 7.5 percent interest, but it will incur underwriting costs related to issuing the bonds of $200,000. Its third alternative is to issue $2,000,000 in preferred stock that will require annual payments of 5 percent. The stock will be callable at the end of 10 years at 102. The costs of issuing the preferred stock will only be $50,000. Which alternative should the choose? The corporation's effective tax rate is expected to be 30 percent for all relevant years, and the uses a 6 percent for all of its financial analyses.
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