Question

In 2015 Beta Corporation earned gross profits of $840,000.

a. Suppose that it is financed by a combination of common stock and $1.08 million of debt. The interest rate on the debt is 9%, and the corporate tax rate is 35%. How much profit is available for common stockholders after payment of interest and corporate taxes? (Do not round intermediate calculations. Enter your answer in dollars not millions and round your answer to the nearest whole dollar amount.)

Profit available to common stockholders $

b. Now suppose that instead of issuing debt Beta is financed by a combination of common stock and $1.08 million of preferred stock. The dividend yield on the preferred is 7% 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? (Do not round intermediate calculations. Enter your answer in dollars not millions and round your answer to the nearest whole dollar amount.)

Profit available to common stockholders $

Answer 1

Option A. $1.08 million of debt at interest rate of 9%
Debt	$ 1,080,000.00
Interest rate	9%
Interest payment	$1,080,000 * 9% = $ 97,200
Tax rate	35%
	FY 2015
Gross profit	$840,000
Interest	$97,200
Profit before tax (Gross profit - Interest)	$742,800
Tax (Profit before tax * tax rate)	$259,980
PAT (Profit before tax - tax)	$482,820
Profit available to common stockholders $ 482,820
Note : As there are no preferred stocks the profit after tax is profit available to common stockholders
Option B. $1.08 million of preferred stock. The dividend yield on the preferred is 7%
Preferred stock	$ 1,080,000.00
Dividend yield	7%
Interest payment	$1,080,000 * 7% = $ 75,600
Tax rate	35%
	FY 2015
Gross profit	$840,000
Interest	$0
Profit before tax (Gross profit - Interest)	$840,000
Tax (Profit before tax * tax rate)	$294,000
PAT (Profit before tax - tax)	$546,000
Preferred dividend (1,080,000 * 7%)	$75,600
Profit after tax and preferred dividend	$470,400
Profit available to common stockholders $ 470,400
Note : Dividend on preferred stock is distributed from profit after tax