Purchase Solution

# Interest versus dividend expense

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Interest versus dividend expense. Michael's Corporation expects earnings before interest and taxes to be \$38,000 for this period. Assuming an ordinary tax rate of 40%, compute the firm's earnings after taxes and earnings available for common shareholders (earnings after taxes and preferred stock dividends, if any) under the following conditions:
a) The firm pays \$ 9,000 in interest
b) The firm pays \$ 9,000 in preferred stock dividends

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This solution discusses interest versus dividend expense.

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a) The firm pays \$ 9,900 in interest
Interest is deducted before calculating taxes.
Earnings before interest and taxes = EBIT = \$ 38,000
Interest = \$9,900
Earnings before taxes= ...

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