Assuming a 40 percent tax rate, what is the financial breakeven point

Assuming a 40 percent tax rate, what is the financial breakeven point for each plan? (See Table 12.1 )

What will be an ideal response?

ANSWER

Financial breakeven point = Interest + Preferred Dividends / (1 – t)
Financing Plan 1: FBP = $25,000 +$ 3,000 / (1 – 0.40 ) = $30,000
Financing Plan 2: FBP = $50,000 + $1,500 / (1 – 0.40 ) = $52,500