1. George comes to you asking for your advice. He wants to invest $10,000 either in a debt security or in an equity investment. His choices are shown below.

• Redbreast Corporation bond, annual coupon rate of 7.5%.

• City of Philadelphia general obligation bond, annual coupon rate of 6.0%.

• Blue Corporation 7.5% preferred stock (produces qualified dividend income).

These alternatives are believed to carry comparable risk. Assuming that George is in the 35% marginal tax bracket (and that dividends are taxed at a 15% rate), which investment alternative could be expected to produce the superior annual after-tax rate of return?