Its Investment Bankers Have Told Donner Corporation That It Can

Multiple Choice

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 after-tax 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%