What are steps in calculating financial breakeven point

Solution

The solution is explained below −

We need to calculate preferred dividends, net interest expense before calculating financial breakeven point

• Preferred dividends = preferred stock * 6% = 150*6% => $9 million

• Net interest expense = total interest expenses – interest income

  • = 150*6% => $9 million

• Net interest expense = total interest expenses – interest income

  • = 15 million – 2 million => 13 million

• Financial breakeven = (PD/1-TR)+ NIE

  • = (9/ (1-28%)) + 13

  • = 12.5 + 13

  • = $ 25.5 million

(Here, PD = preferred dividends, TR = Tax rate and NIE = Net Interest Expense).