Assume that there is a corporate investor wanting to invest $10 million in your firm. Debt or preferred stock can be issued at a cost of 0.10. The firm needs $10 million of capital. Assume a 0.4 corporate tax rate.

a. On a straight cash flow basis, should a firm issue debt or preferred stock?

b. If $1 million of earnings before interest and taxes (EBIT) is available, on a cash flow basis, are the investing firms better off with debt or preferred stock?

c. What amount does the firm have to earn to pay $1 million of interest? To pay $1 million of preferred stock dividends?

d. What is the before-tax percentage cost of 0.10 debt? Of 0.10 preferred stock?

e. What is the after-tax cost of each?

f. What does an investment have to earn after tax to be financed by debt? By preferred stock? Assume a break-even objective for the firm.