The treasurer of Riley Coal Co. is asked to compute the cost of fixed income securities for

Question:

The treasurer of Riley Coal Co. is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the after-tax cost of debt is at least 2 percent less than that for preferred stock. Based on the facts below, is she correct?

Debt can be issued at a yield of 10.6 percent, and the corporate tax rate is 35 percent. Preferred stock will be priced at $50 and pay a dividend of $4.40.

The flotation cost on the preferred stock is $2.

Cost Of Debt
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