Natasha Romanov is the CFO for a waste management business. She is preparing for a

presentation to her CEO and Board of Directors on the capital structure of the firm. Her

intuition is that the after$-$tax cost of debt is at least $4\%$ less than the cost of preferred stock

financing.

Wanting to impress her boss, she asks you to calculate the numbers and verify her intuition.

The firm has debt outstanding with a $9\%$ coupon and a current yield to maturity of $12\%.$ The tax

rate is $25\%.$ It can issue preferred stock for $$50$ per share. These preferred shares have a

dividend of $$6$ and floation costs of $$7.$ Was she right?