Rogers Inc. operates a chain of restaurants located in the Southeast. The company has steadily grown to its present size of 48 restaurants. The board of directors recently approved a large-scale remodeling of the restaurant, and the company is now considering two financing alternatives.

The first alternative would consist of

- Bonds that would have a 9% effective annual rate and would net $19.2 million after flotation costs

- Preferred stock with a stated rate of 6% that would yield $4.8 million after a 4% flotation cost

- Common stock that would yield $24 million after a 5% flotation cost

The second alternative would consist of a public offering of bonds that would have an 11% effective annual rate and would net $48 million after flotation costs.

Rogers' current capital structure, which is considered optimal, consists of 40% long-term debt, 10% preferred stock, and 50% common stock. The current market value of the common stock is $30 per share, and the common stock dividend during the past 12 months was $3 per share. Investors are expecting the growth rate of dividends to equal the historical rate of 6%. Rogers is subject to an effective income tax rate of 40%.The interest rate on the bonds is greater for the second alternative consisting of pure debt than it is for the first alternative consisting of both debt and equity because

A. The pure debt alternative would flood the market and be more difficult to sell.

B. The pure debt alternative carries the risk of increasing the probability of default.

C. The combination alternative carries the risk of increasing dividend payments.

D. The diversity of the combination alternative creates greater risk for the investor.