A corporation has cash flow in excess of investment needs and normal dividend payments. The corporation is considering two alternative uses of the excess funds. In Alternative 1, the corporation increases current dividends. In Alternative 2, the corporation makes a three-year loan and uses the loan proceeds to pay dividends at the end of three years. The following information may be used in choosing between the alternatives. Stockholders can earn 5% after taxes on their investments. The corporate tax rate is 30%. Stockholders currently have a 20% tax rate and will have a 25% tax rate next year. At what pretax return on the loan are stockholders indifferent between the alternatives?

A. 9.6%. B. 10.0%. C. 10.4%. D. 10.8%. E. 11.2%.

Correct answer is 10.4%