A company has $150 million preferred stock at 6% per annum. Company’s total interest expenses are $ 15 million and it earns $ 2 million as interest income. Tax rate is 28%. Calculate company’s financial breakeven point.
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29-09-2020 - |
문제
A company has $150 million preferred stock at 6% per annum. Company’s total interest expenses are $ 15 million and it earns $ 2 million as interest income. Tax rate is 28%. Calculate company’s financial breakeven point.
Solution
The solution is explained below −
We need to calculate preferred dividends, net interest expense before calculating financial breakeven point
Preferred dividends = preferred stock * 6% = 150*6% => $9 million
Net interest expense = total interest expenses – interest income
= 150*6% => $9 million
Net interest expense = total interest expenses – interest income
= 15 million – 2 million => 13 million
Financial breakeven = (PD/1-TR)+ NIE
= (9/ (1-28%)) + 13
= 12.5 + 13
= $ 25.5 million
(Here, PD = preferred dividends, TR = Tax rate and NIE = Net Interest Expense).
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