6.2. Goiânia Corporation is expecting to have EBIT next year of $11 million, wit
ID: 2718020 • Letter: 6
Question
6.2. Goiânia Corporation is expecting to have EBIT next year of $11 million, with a standard deviation of $7 million. Goiânia has $35 million in bonds with coupon of 8%, selling at par, which are being retired at the rate of $2.5 million annually. Goiânia also has 200,000 shares of preferred stock, which pays annual dividend of $5.25 per share. The tax rate of Goiânia is 35%. Calculate the probability that Goiânia will not be able to pay interest, sinking fund, and preferred dividends, out of its current income, next year.
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Explanation / Answer
Interest on Bonds = $35,000,000 x 8% = $2,800,000
Preferred Dividend = 200,000 shares x $5.25 per share = $1,050,000
Pretax Preferred Dividend = $1,050,000/(1-35%) = $1,615,384.62
Loss level of EBIT = Interest plus pretax preferred stock dividends;
Loss level of EBIT = $2,800,000 + $1,615,384.62 = $4,415,384.62
Number of standard Deviation (z) = ( Loss level of EBIT - Expected EBIT )/ standard Deviation
Number of standard Deviation (z) = ($4,415,384.62- $11,000,000)/ $7,000,000 = -0.9407 standard deviations
From Table V, p(z < -.9407) = 17.34%
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