Suppose that it is financed by a combination of common stock and $1 million of d
ID: 2638823 • Letter: S
Question
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.)
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.)
In 2011 Beta Corporation earned gross profits of $760,000.
Explanation / Answer
a. Profit for common stockholdrs = (Profit before tax - Interest of debt) * (1-Tax rate)
= [$760,000 - ($1,000,000 * 10%)] * (1-0.35)
= ($760,000 - $100,000) * 0.65
= $429,000 (Answer)
b. Profit for common stckholders = {Profit before tax * (1- Tax rate)} - Preferred dividends
= {$760,000 * 0.65} - ($1,000,000 * 8%)
= $494,000 - $80,000
= $414,000 (Answer)
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