Question:
A & Z inc an average $ 4 million taxable income a year,Because it needs an infusion cash ,the board of directors is considering tow option : selling a new issue of preferred stock to public for a total offering price $ 500,000 or borrowing $ 500,000 from a local bank .the market dividend rate on preferred stock is only 5.6 percent , while the bank's interest is 9 percent . Which option minimize the after tax cost of the new capital ?