QuestionA firm with a 40% tax rate has $10 million of preferred shares… A firm with a 40% tax rate has $10 million of preferred shares outstanding (each share has a $100 par value) that pay a dividend of 10 percent and are callable at a premium of 6 percent. Issuing and underwriting expenses of $700,000 would have to be incurred.(a) Assume that current dividend rates have dropped to 8 percent. What would be the market price of a preferred share (if it were non-redeemable/non-callable/non-retractable)?(b) To what level would the dividend rate (on comparable issues) have to drop to in order to make refinancing attractive?(c) Assume that dividend yields have dropped to 8 percent.How many years will it take for the company to recoup the initial refinancing costs?(d) Assume that the company chooses to call the 10% issue and refinance (with new shares) at 8%. What is the maximum number of new preferred shares (each new share has a $100 par value) the firm can issue without increasing total annual dividend payments from their current level (at 10%)?LawSocial ScienceTax law FMGT 2474
