The treasurer of Kelly Bottling Company $($a corporation$)$ currently has $$250,000$ invested in preferred stock yielding $9$ percent. He appreciates the tax advantages of preferred stock and is considering buying $$250,000$ more with borrowed funds. The cost of the borrowed funds is $11$ percent. He suggests this proposal to his board of directors. They are somewhat concerned by the fact that the treasurer will be paying $2$ percent more for funds than the company will be earning on the investment. Kelly Bottling is in a $35$ percent tax bracket, with dividends taxed at $10$ percent.

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.

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.

Should the treasurer proceed with his proposal?

multiple choice $1$

No

Yes

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?

multiple choice $2$

Favorable

Unfavorable