Corporation X needs $1,000,000 and can raise this through debt at an annual rate of 10 percent, or preferred stock at an annual cost of 7 percent. If the corporation has a 40 percent tax rate, the after‑tax cost of each is
A. debt: $100,000; preferred stock: $70,000.
B. debt: $60,000; preferred stock: $42,000.
C. debt: $60,000; preferred stock: $70,000.
D. debt: $100,000; preferred stock: $42,000.
Answer:C
Corporation X needs $1,000,000 and can raise this through debt at an annual rate of 10 percent, or preferred stock at an annual cost of 7 percent. If the corporation has a 40 percent tax rate, the after‑tax cost of each is
A. debt: $100,000; preferred stock: $70,000. B. debt: $60,000; preferred stock: $42,000. C. debt: $60,000; preferred stock: $70,000. D. debt: $100,000; preferred stock: $42,000.