Mariano manufacturing can issue a 25-year, 8.1% annual payment bond

Mariano Manufacturing can issue a 25-year, 8.1% annual payment bond at par. Its investment

bankers 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%

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