Question

The treasurer of Kelly Bottling Company (a corporation) currently has $130,000 invested in preferred stock yielding 7 percent. He appreciates the tax advantages of preferred stock and is considering buying $130,000 more with borrowed funds. The cost of the borrowed funds is 12 percent. He suggests this proposal to his board of directors. They are somewhat concerned by the fact that the treasurer will be paying 5 percent more for funds than the company will be earning on the investment. Kelly Bottling is in a 30 percent tax bracket, with dividends taxed at 20 percent.

a. Compute the amount of the aftertax income from the additional preferred stock if it is purchased. (Do not round intermediate calculations and round your answer to the nearest whole dollar.)


b. Compute the aftertax borrowing cost to purchase the additional preferred stock. (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

ke - Microsoft Excel (Product Activation Failed) Add-Ins File Home Insert Page Layout Formulas Data Review View - 2x % Cut Σ AutoSum : A General Fill Z $ $ % % , .0 .00 :.: Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles 2 Clear Sort & Filter Editing Find & Select Number Cells Calibri -11AA = = = Dr Wrap Text E Copy Paste BIU - D E A E E Merce Format Painter Merge & Center - Center, Clipboard Font Alignment OA223 c И NZ OA Oв осор 211 OE OF OG оно о я 212 213 214 215 PREFERRED DIVIDEND = TAX @ 20% = AFTER TAX INCOME = 9100 (130000 X 7%] 1820 7280 216 217 218 219 INTEREST ON BORROWING = TAX SAVING @ 30% NET INTEREST COST = 15600 [130000 X 12%] 4680 10920 220 221 222 223 224 225 226 227 228 229 230 231 M convexity DGM betaport future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR right clean YIELD bond portfolio HI Rea KE CAPM UTILITY, SHARPE, beta ferences: CF670 cap stru WACC RESI el BOJ 120% 0- 0 6 . B * * 0 ENG 20-11-2019

Answer 2

a. 8554

9,100-546=