The Stuart Corporation Has Excess Cash to Invest in One

Multiple Choice

The Stuart Corporation has excess cash to invest in one of two securities. The company's tax rate is 40 percent. The first alternative is a 10-year, 10 percent coupon bond (with semiannual interest payments) that has a current price of $1,000 and a yield of 10 percent. The second alternative is the preferred stock of Pickett Corp. which promises to pay a before-tax return of 9 percent. What is the after-tax nominal return of the better investment alternative?

A) 7.92%
B) 9.00%
C) 7.33%
D) 5.40%
E) 7.00%