The treasurer of Kelly Bottling Company $($a corporation$)$ currently has $$300,000$ invested in preferred stock yielding $6$ percent. He

appreciates the tax advantages of preferred stock and is considering buying $$300,000$ more with borrowed funds. The cost of the

borrowed funds is $10$ percent. He suggests this proposal to his board of directors. They are somewhat concerned by the fact that the

treasurer will be paying $4$ percent more for funds than the company will be earning on the investment. Kelly Bottling is in a $34$ percent

tax bracket, with dividends taxed at $15$ percent.

a$.$ Compute the amount of the aftertax income from the additional preferred stock if it is purchased.

Note: Do not round intermediate calculations and round your answer to the nearest whole dollar.

Answer is complete but not entirely correct.

b$.$ Compute the aftertax borrowing cost to purchase the additional preferred stock.

Note: Do not round intermediate calculations and round your answer to the nearest whole dollar.

Answer is complete and correct.

c$.$ Should the treasurer proceed with his proposal?

Yes

No $o.$

d$.$ If market interest rates and dividend yields increase six months after a purchase decision is made, will the impact of those increases

be favorable or unfavorable for the firm?

Unfavorable $o.$

Favorable