In 2011 Beta Corporation earned gross profits of $780,000. a. Suppose that it is
ID: 2762968 • Letter: I
Question
In 2011 Beta Corporation earned gross profits of $780,000. a. Suppose that it is financed by a combination of common stock and $1.02 million of debt. The interest rate on the debt is 12%, and the corporate tax rate is 40%. 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 $1.02 million of preferred stock. The dividend yield on the preferred is 10% and the corporate tax rate is still 40%. 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. Profit available for common stockholders = Gross profit - Interest expense - Income tax = 780,000 - 122,400 - 263,040 = $ 394,560
b. Profit available for common stockholders = Gross profit - tax - preferred dividend = 780,000 - 312,000 - 102,000 =
$ 366,000
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