A corporation plans to buy out a supplier and needs $2 million in new capital to do so. The proportion of equity to debt financing will be 40:60 for the acquisition. The current cost of equity capital is 14% after taxes, and it is 12% before taxes for debt financing. The effective income-tax rate is 55% . What is the minimum amount of before-tax earnings necessary per year from the purchase to justify raising the required capital ? What minimum after-tax earnings should be expected?

A corporation plans to buy out a supplier and needs $2 million in new capital to do so. The proportion of equity to debt financing will be 40:60 for the acquisition. The current cost of equity capital is 14% after taxes, and it is 12% before taxes for debt financing. The effective income-tax rate is 55% . What is the minimum amount of before-tax earnings necessary per year from the purchase to justify raising the required capital ? What minimum after-tax earnings should be expected?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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