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Its investment bankers have told Donner Corporation that it can issue a 25-year, 8.1% annual payment bond at par. They 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 aftertax 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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This posting provides a detailed solution to the given 25-year, 8.1% annual payment bond question.

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Answer: a

Maturity 25 Pfd. exclusion 70%
Coupon rate 8.10% Tax rate 40.00%
Risk premium 1.00%
Bond yield AT = BT ...

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