A corporation has $5,000,000 of 10 percent bonds and $3,000,000 of 12 percent preferred stock outstanding. The firm's financial breakeven (assuming a 40 percent tax rate) is ________.
A) $860,000
B) $716,000
C) $1,100,000
D) $1,400,000

Question

Quizplus · Accepted Answer

Financial Breakeven = (Interest expense + Preferred stock dividends)(1 - Tax rate)

Interest expense = $5,000,000 x 0.10 = $500,000 
Preferred stock dividends = $3,000,000 x 0.12 = $360,000

Financial Breakeven = ($500,000 + $360,000)(1 - 0.40) = $516,000 x 0.60 = $1,100,000

A Corporation Has $5,000,000 of 10 Percent Bonds and $3,000,000