Question : The CFO of ARE Corp proposes that the company finance : 5611

The CFO of ARE Corp proposes that the company finance its project by selling a security that will pay an annual return equal to 40% of annual pretax earnings. If earnings from the project are negative, then the investors will get a zero return that year. Careful market research reveals that ARE could sell 100.000 certificates of this security for $50 (e.g. if the project made $1 million in a given year, then earnings per certificate would be $10 and the payout to the investors would be $4 per certificate). Suppose that the corporate tax rate is 35% and that payouts on this security are tax deductible. From the point of view of ARE Corp. rank the three financing options from best to worst. The three options are the new security, debt, and equity.