A company has 5 million outstanding preferred shares with a market value of $45 per share.

The shares pay a quarterly dividend of $1.20, and this dividend was paid yesterday.

The shares were issued 5 years ago and have no maturity, but the company has an opportunity to call the shares if it pays a call premium of 3 %, plus accumulated dividends.

If new preferred shares are issued at this time at a price of $45 per share, the quarterly dividend would be $1.35. The old issue would remain outstanding for 2 months after the new preferred shares were sold, and interest could be earned on the proceeds of the new issue at a rate of 5% per annum.

The corporate tax rate is 35%.

What is the amount the company must pay in additional dividends during the overlap period, net of any interest earned during this period?

a) 4,000,000

b) 2,781,250

c) 2,175,000

d) 1,125,000