For firms subject to the 34% marginal tax rate, the after-tax cost of is roughly two-thirds the cost of preferred stock.

Question

Quizplus · Accepted Answer

The after-tax cost of long-term debt is lower than the cost of preferred stock for firms subject to the 34% marginal tax rate. This is because interest payments on debt are tax-deductible, leading to a lower cost of capital. Retained earnings and new common stock do not have a tax advantage and therefore have a higher after-tax cost compared to long-term debt.

For Firms Subject to the 34% Marginal Tax Rate, the After-Tax