A corporation has $5,000,000 of 6 percent bonds and $9,600,000 of 5 percent preferred stock outstanding.The firm's financial breakeven (assuming a 21 percent tax rate)is ________.

Question

Quizplus · Accepted Answer

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

Interest expense = $5,000,000 x 0.06 = $300,000
Preferred stock dividends = $9,600,000 x 0.05 = $480,000
Tax rate = 21%

Financial breakeven = ($300,000 + $480,000) / (1 - 0.21) = $907,595

A Corporation Has $5,000,000 of 6 Percent Bonds and $9,600,000