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
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
Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)
7th Edition
ISBN:9780357033609
Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Chapter12: Investing In Stocks And Bonds
Section: Chapter Questions
Problem 4FPE: The Castle Company recently reported net profits after taxes of $15.8 million. It has 2.5 million...
Related questions
Concept explainers
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.
Question
Transcribed Image Text: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
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps with 4 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Pfin (with Mindtap, 1 Term Printed Access Card) (…
Finance
ISBN:
9780357033609
Author:
Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher:
Cengage Learning
PFIN (with PFIN Online, 1 term (6 months) Printed…
Finance
ISBN:
9781337117005
Author:
Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher:
Cengage Learning
Fundamentals of Financial Management, Concise Edi…
Finance
ISBN:
9781305635937
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Pfin (with Mindtap, 1 Term Printed Access Card) (…
Finance
ISBN:
9780357033609
Author:
Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher:
Cengage Learning
PFIN (with PFIN Online, 1 term (6 months) Printed…
Finance
ISBN:
9781337117005
Author:
Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher:
Cengage Learning
Fundamentals of Financial Management, Concise Edi…
Finance
ISBN:
9781305635937
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Fundamentals Of Financial Management, Concise Edi…
Finance
ISBN:
9781337902571
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Fundamentals of Financial Management, Concise Edi…
Finance
ISBN:
9781285065137
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
