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).

Published on 25-Sep-2020 19:55:24