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Part 1

Interest versus dividend expenseMichaels Corporation expects earnings before interest and taxes to be

$44,000

for the current period. Assuming a flat ordinary tax rate of

21%,

compute the firm's earnings after taxes and earnings available for common stockholders (earnings after taxes and preferred stock dividends, if any) under the following conditions:

a. The firm pays

$12,500

in interest.

b. The firm pays

$12,500

in preferred stock dividends.

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Part 1

a. Complete the fragment of Michaels Corporation's income statement below to compute the firm's earnings after taxes and earnings available for common stockholders under condition

(a).

(Round to the nearest dollar.)

EBIT$Less: Interest expenseEarnings before taxes$Less: Taxes (21%)Earnings after taxes$Less: Preferred dividendsEarnings available for common stockholders$

Part 2

b. Complete the fragment of Michaels Corporation's income statement below to compute the firm's earnings after taxes and earnings available for common stockholders under condition

(b).

(Round to the nearest dollar.)

EBIT$Less: Interest expenseEarnings before taxes$Less: Taxes (21%)Earnings after taxes$Less: Preferred dividendsEarnings available for common stockholders$

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