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  3. a firm with a 40% tax rate has $10 million of pref

A firm with a 40% tax rate has $10 million of preferred shares outstanding (each...

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Finance

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 10 percent. Issuing and underwriting expenses of $800,000 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%)?

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