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Bonnle Lam is a credit analyst at the well-known bank J.P. Morgan Chase. She is analyzing the financial statements of Madison, Inc., a prominent corporate
Bonnle Lam is a credit analyst at the well-known bank J.P. Morgan Chase. She is analyzing the financial statements of Madison, Inc., a prominent corporate cllent, and borrower from the bank. In particular, she is working to compute Madison's Debt/Equity ratio. Madison's sources of funds Include $5 Million in Llabilities (debt), \$2 Million In Preferred Stock, and $10 Million in Common Equity. From the perspective of the bank,_should Bonnie consider the amount of Preferred Stock as Debt or as Equity? Justify your answer. A company's funding consists of debt and equity (assume no preferred stock or other forms of hybrid funding). We have learned that the after-tax cost of debt is significantly lower than the after-tax cost of equity. We also know that a company's objective is to minimize its WACC. Therefore, would it make sense for a company to be funded primarily (e.g., 80% or 90% ) with debt to minimize its WACC? Explain in detail
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