GQ earned $740,000 before taxes this year. The firm has a debt ratio of 30%, a marginal tax rate of 35%, and a dividend payout ratio of 40%. GQ has no preferred stock. What is GQ's break point for equity?

Question

Quizplus · Accepted Answer

First, we need to calculate GQ's net income:

Net Income = EBIT (1 - Tax Rate)
Net Income = $740,000 (1 - 0.35)
Net Income = $481,000

Next, we need to calculate GQ's dividend payment:

Dividends = Net Income x Dividend Payout Ratio
Dividends = $481,000 x 0.4
Dividends = $192,400

Then, we need to calculate GQ's equity:

Equity = Net Income - Dividends
Equity = $481,000 - $192,400
Equity = $288,600

Finally, we can calculate GQ's break point for equity:

Break Point = Equity / (1 - Debt Ratio)
Break Point = $288,600 / (1 - 0.3)
Break Point = $288,600 / 0.7
Break Point = $412,286.

GQ Earned $740,000 Before Taxes This Year