Compute the cost of fixed income securities for corporation

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The treasurer of Sutton Security Systems is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 2 percent less than that for preferred stock. Based on the following facts, is she correct?

Debt can be issued at a yield of 10.5 percent, and the corporate tax rate is 34 percent. Preferred shares will be priced at $50 and pay a dividend of $4.40. The flotation cost on the preferred stock is $2.00.

Reference no: EM13974539

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