Question

Interest versus dividend expense Michaels Corporation expects earnings before interest and taxes to be $ 42 comma 000 for the current period. Assuming a flat ordinary tax rate of 22 %​, compute the​ firm's earnings after taxes and earnings available for common stockholders​ (earnings after taxes and preferred stock​ dividends, if​ any) under the following​ conditions: a. The firm pays $ 11 comma 500 in interest. b. The firm pays $ 11 comma 500 in preferred stock dividends.

Answer 1

a. $23,790 ; $23,790

b. $42,000 ; 21,260

Step-by-step explanation:

The computation is shown below:

a. For the first case

EBIT $42000

Less interest expense -$11,500

Earnings before taxes $30,500

Less: tax rate -$6,710 (22% of $30,500)

Earning after taxes $23,790

Less preferred dividend $0

Earnings available for common stockholders $23,790

b. For the second case

EBIT $42000

Less interest expense $0

Earnings before taxes $42,000

Less: tax rate -$9,240 (22% of $42,000)

Earning after taxes $32,760

Less preferred dividend $0-$11,500

Earnings available for common stockholders $21,260