Interest versus dividend expense Porter Corporation forecast that it would generate earnings before interest and tax of $250,000 for the current financial year. Assume a flat tax rate of 35% and all after-tax earnings are paid to the stockholders.
a. If no interest payments are made, how much of the earnings are available to be distributed to the stockholders?
b. If an interest payment of $8, 500 is made, how much of the earnings are available to be distributed to the stockholders?
c. Why is there a difference in the tax liability in parts a and b?