Suppose that markets are perfect except that firms must pay corporate taxes. Consider an all-equity firm.

Suppose that this all-equity firm issues preferred stock, and pays out the proceeds of the preferred stock issue to the current (before issue) shareholders as a dividend. The firm does not change its operating policy, so the preferred stock issue will not affect the firms free cash flows.

Will the preferred stock issue affect the value of the firm?

Will the preferred stock issue affect the required return on the fifirms common (i.e. non-preferred) stock?