Computation of coupon rate

Reference no: EM1360598

Its investment bankers have told Donner Corporation that it can issue a 25-year, 8.1% annual payment bond at par. They also stated that the company can sell an issue of annual payment preferred stock to corporate investors who are in the 40% tax bracket. The corporate investors require an after-tax return on the preferred that exceeds their after-tax return on the bonds by 1.0%, which would represent an after-tax risk premium. What coupon rate must be set on the preferred in order to issue it at par?

A. 6.66%
B. 6.99%
C. 7.34%
D. 7.71%
E. 8.09%

Reference no: EM1360598

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