In 2011 Beta Corporation earned gross profits of $760,000. a. Suppose that it is

Question

In 2011 Beta Corporation earned gross profits of $760,000.   a. Suppose that it is financed by a combination of common stock and $1 million of debt. The interest rate on the debt is 10%, and the corporate tax rate is 35%. How much profit is available for common stockholders after payment of interest and corporate taxes? (Enter your answer in nearest dollars not in millions.)      Profit$      b. Now suppose that instead of issuing debt Beta is financed by a combination of common stock and $1 million of preferred stock. The dividend yield on the preferred is 8% and the corporate tax rate is still 35%. How much profit is now available for common stockholders after payment of preferred dividends and corporate taxes? (Enter your answer in nearest dollars not in millions.)      Profit$   

Explanation / Answer

a) Calculation of profit available to common stock holder Amounts in $ Gross Profit 760000 Less: Interest on debt 100000 (10%* $1 Million) EBT 660000 Less: Tax @ 35% 231000 Earning available to common stock holders 429000 a) Calculation of profit available to common stock holder Amounts in $ Gross Profit 760000 Less: Interest on debt 0 EBT 760000 Less: Tax @ 35% 266000 Earning available to preferred and common stock holders 494000 Less: Dividend paid to preferred stock holders 80000 (8%*$1 Million) Earning available to common stock holders 414000

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