Tempo Corp, is considering to issue preferred stock to finance a new artillery line. The firm's existing preferred stock pays a dividend of $3.00 per share and is selling for $30 per share.
a) Investment bankers have advised Tempo that flotation cost on the new preferred issue would be 5% of the selling price. Tempo's marginal tax is 30%. What is the relevant cost of new preferred stock?
b) Given the higher cost of issuing new preferred stock, the company is also considering a possibility of issuing new bonds. List and explain two advantages and two disadvantages of issuing bonds compared to preferred stock.