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timer Asked: Nov 16th, 2016

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Determine the after-tax risk premium on preferred stock versus debt demanded by an organizational investor. Preferred stock shares with a $100 par value are currently trading at $62 per share and pay a 5% dividend. Twenty-five year, $1,000 par value bonds issued five years ago are currently trading at par and have an 8.5% coupon rate with coupons paid semiannually. Assume the firm’s ownership percentage of preferred stock is less than 20%.

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