If the company is to achieve its earnings target for the year ending 31 December 20X2, what is the minimum operating profit (profit before interest and tax) that it must achieve?

An all equity financed company reported earnings for the year ending 31 December 20X1 of $5 million.

One of its financial objectives is to increase earnings by 5% each year.

In the year ending 31 December 20X2 it financed a project by issuing a bond with a $1 million nominal value and a coupon rate of 7%.

The company pays corporate income tax at 30%.

If the company is to achieve its earnings target for the year ending 31 December 20X2, what is the minimum operating profit (profit before interest and tax) that it must achieve?
A . $5.25 million
B . $7.50 million
C . $7.57 million
D . $8.40 million

View Answer

Answer: C