Interest versus dividend expense Michaels Corporation expects earnings before interest and taxes to be $ 42 comma 000 for the current period. Assuming a flat ordinary tax rate of 22 % , 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 $ 11 comma 500 in interest. b. The firm pays $ 11 comma 500 in preferred stock dividends.

a. $23,790; $23,790

b. $42,000; 21,260

Explanation:

The computation is shown below:

a. For the first case

EBIT $42000

Less interest expense - $11,500

Earnings before taxes $30,500

Less: tax rate - $6,710 (22% of $30,500)

Earning after taxes $23,790

Less preferred dividend $0

Earnings available for common stockholders $23,790

b. For the second case

EBIT $42000

Less interest expense $0

Earnings before taxes $42,000

Less: tax rate - $9,240 (22% of $42,000)

Earning after taxes $32,760

Less preferred dividend $0-$11,500

Earnings available for common stockholders $21,260