There is a corporate investor wanting to invest $10 million in your firm. Debt or preferred stock can be issued at a cost of .10. The fmn needs $10 million ofcapital.

a. On a straight cash flow basis, should you 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 ftrms better offwith debt or preferred stock?

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

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

e. What isthe after-tax cost ofeach ifthey pay.lO?

£ What does an investment have to earn after tax to be financed by debt? By preferred stock? Asswne a break-even objective for the firm with no uncertainty.