Question

In 2018, Beta Corporation earned gross profits of \$760,000. a. Suppose that Beta was financed by a combination of common stock and \$1 million of debt. The interest rate on the debt was 10\%, and the corporate tax rate in 2018 was 21\%. How much profit was available for common stockholders after payment of interest and corporate taxes

Answer 1

Answer: $521,400

Step-by-step explanation:

To find out how much profit was available for common stockholders after payment of interest and corporate taxes, we will simply remove the tax and the interest payment.

Interest Payment will be,

= 10% of $1 million

= 0.1 * 1,000,000

= $100,000

Subtracting that from the gross profit before we calculate for tax we have,

= 760,000 - 100,000

= $660,000

Then we have to account for Tax,

= 660,000 ( 1 - 0.21)

= $521,400

This means then that $521,400 was the amount of profit available for common stockholders after payment of interest and corporate taxes.