XYZ Corporation is considering issuing bonds to finance a new project. The company estimates that the project will require $10 million in funding. The CFO is evaluating different capital structure scenarios:

• Scenario 1: Issuing $10 million in bonds with a coupon rate of 6%.
• Scenario 2: Issuing $5 million in bonds with a coupon rate of 5% and $5 million in preferred stock with a dividend rate of 7%.

Calculate the interest expense for each scenario and discuss the implications for XYZ Corporation's financial risk and cost of capital.