Problem 13-9 Preferred stock In 2021, Beta Corporation earned gross profits of $820,000. a. Suppose that Beta was financed by a combination of common stock and $1.06 million of debt. The interest rate on the debt was 11%, and the corporate tax rate in 2021 was 21%. How much profit was available for common stockholders after payment of interest and corporate taxes? b. Now suppose that instead of issuing debt, Beta was financed by a combination of common stock and $1.06 million of preferred stock. The dividend yield on the preferred was 9%, and the corporate tax rate was still 21%. Recalculate the profit available for common stockholders after payment of preferred dividends and corporate taxes. Note: Do not round intermediate calculations. Enter your answers in dollars not millions and round your answers to the nearest whole dollar amount. a. Profit available to common stockholders b. Profit available to common stockholders
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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