A firm with a 40% tax rate has $5 million of preferred shares outstanding (each share has a $100 par value) that pay a dividend of 6 percent and are callable at a premium of 5 percent.Issuing and underwriting expenses of $500,000 would have to be incurred.

Assume that the company chooses to call the 6% issue and refinance (with new shares) at 4%.What is the maximum number of new preferred shares (each new share has a $100 par value) the firm can issue without increasing total annual dividend payments from their current level (at 6%)?