Calculate the net profit of each corporation-both economic profit and accounting

Question

Calculate the net profit of each corporation-both economic profit and accounting profit. Which corporation has the greater economic profit? Which has the greater accounting profit? Implications?


Corporation A (Acquires capital/funding by selling bonds)
Total Sales/Revenues $100 Million
Total Expenses $70 Million
Average=Marginal Tax Rate 25%
Cost of Borrowed Capital $10 Million

Corporation B (Acquires capital/funds by selling stock)
Total Sales/Revenues $100 Million
Total Expenses $70 Million
Average=Marginal Tax Rate 25%
Cost of equity capital $10 Million

Explanation / Answer

Corporation - A Corporation - B In Million $ In Million $ Sales Revenue 100 100 Expenses 70 70 Profit befor tax 30 30 Tax 25% 7.5 7.5 Accounting Profit 22.5 22.5 Cost of Capital 10 10 Economic Profit 12.5 12.5 Corporation - A Corporation - B In Million $ In Million $ Sales Revenue 100 100 Expenses 70 70 Profit befor tax 30 30 Tax 25% 7.5 7.5 Accounting Profit 22.5 22.5 Cost of Capital 10 10 Economic Profit 12.5 12.5
Note: To calculating Economic Profit we have to deduct cost of capital (Equity + Debt). Thank you.... Corporation - A Corporation - B In Million $ In Million $ Sales Revenue 100 100 Expenses 70 70 Profit befor tax 30 30 Tax 25% 7.5 7.5 Accounting Profit 22.5 22.5 Cost of Capital 10 10 Economic Profit 12.5 12.5

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