1. Interest versus dividend expense. Michaels Corporation expects earnings before interest and taxes to be $50,000 for the current period. Assuming an ordinary tax rate of 35%, 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 $12,000 in interest.
b. The firm pays $12,000 in preferred stock dividends.
2. A sinking fund is managed by a trustee for which one of the following purposes?
1. Reducing bond coupon rates.
2. Converting bonds into equity securities.
3. Early bond redemption.
4. Paying preferred dividends.
5. Paying bond interest payments.