The treasurer of Kelly Bottling Company (a corporation) currently has $100,000 invested in preferred stock yielding 8 percent. He appreciates the tax advantages of preferred stock and is considering buying $100,000 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 2 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. (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

b. Compute the aftertax borrowing cost to purchase the additional preferred stock. (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

c. Should the treasurer proceed with his proposal?

	No
	Yes

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
	Favorable

e treasurer of Kelly Botting Company (a corporatian) currently has $100,000 investec in preferred stock yieldng a percent. He appreciates the tax advantages of preferred stock and is considering buying $100 c000 more with berrowed funds. The cost of the borrowed funds is 10 percent. He suggests this proposal to his board of directors. They are somewhat concemed by the fact that the treasurer will be paying 2 parcent more for funds than the company i be earning on the Investment Kelly Bottlng is In a 34 percent tax brac ket, with dMdends taxed at 15 percent compute the pute the nertax n hased (po n ncome trom percent,he co aodtional pretered stock Ir t rchased. round yo nd Intermedlate calculations nearest b. Crule the altertak trwing crest o purrhase he adciional reldlck (Do not round intermediate calculations and round your ansver to the nearest whole dollar.) velerest stoxck nd your a harming cast c. Snoula e. Should the treasurer proceed wth his proposa? O Yes d. I market interest rates and dividend yields increase sic months after a purchase decision is made, wi the impact of those increases be favorable or unfavorable for the fim? O Unfavorable Favorable