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#38 Garnet Corporation is considering issuing risk-free debt, or risk-free preferred stock. The tax rate on interest income is 42%, and the tax rate on
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Garnet Corporation is considering issuing risk-free debt, or risk-free preferred stock. The tax rate on interest income is 42%, and the tax rate on dividends or capital gains from preferred stock is 20%. However, the dividends on preferred stock are not deductible for corporate tax purposes, and the corporate tax rate is 36%. a. If the risk-free interest rate for debt is 9%, what is cost of capital for risk-free preferred stock? b. What is the after-tax debt cost of capital for the firm? Which security is cheaper for the firm? c. Is the after-tax debt cost of capital equal to the preferred stock cost of capital multiplied by (1) ? a. If the risk-free interest rate for debt is 9%, what is cost of capital for risk-free preferred stock? If the risk-free interest rate for debt is 9%, the cost of capital for risk-free preferred stock is \%. (Round to two decimal places.) b. What is the after-tax debt cost of capital for the firm? Which security is cheaper for the firm? The after-tax debt cost of capital is \%. (Round to two decimal places.) Which security is cheaper for the firm? (Select from the drop-down menu.) c. Is the after-tax debt cost of capital equal to the preferred stock cost of capital multiplied by (1) ? The after-tax debt cost of capital is equal to the preferred stock cost of capital multiplied by (1). This is (Select from the drop-down menu.)Step by Step Solution
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