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2 February, 01:42

Interest versus dividend expense Michaels Corporation expects earnings before interest and taxes to be $ 42 comma 000 for the current period. Assuming a flat ordinary tax rate of 22 % , compute the firm's earnings after taxes and earnings available for common stockholders (earnings after taxes and preferred stock dividends, if any) under the following conditions: a. The firm pays $ 11 comma 500 in interest. b. The firm pays $ 11 comma 500 in preferred stock dividends.

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  1. 2 February, 01:53
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    a. $23,790; $23,790

    b. $42,000; 21,260

    Explanation:

    The computation is shown below:

    a. For the first case

    EBIT $42000

    Less interest expense - $11,500

    Earnings before taxes $30,500

    Less: tax rate - $6,710 (22% of $30,500)

    Earning after taxes $23,790

    Less preferred dividend $0

    Earnings available for common stockholders $23,790

    b. For the second case

    EBIT $42000

    Less interest expense $0

    Earnings before taxes $42,000

    Less: tax rate - $9,240 (22% of $42,000)

    Earning after taxes $32,760

    Less preferred dividend $0-$11,500

    Earnings available for common stockholders $21,260
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