new common stock financing provide whatever equity financing is
needed but not provided by retained earnings.
B.8
EARNINGS AND FINANCING COSTS
EBIT
= earnings before interest and taxes, i.e., earnings from
operations
r
(t) = rate of earnings return on total capital (an
input).
Then
EBIT
= r (t) · TF (t)
(B–17)
where
TF (t), the total financing, is the book value of
total capital.
The
interest on debt and the amount of dividends paid on preferred
stock are
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PSDIV (t) = PSDIV (t
− 1) + NPS (t) · ip
(t) (B–19)
where
REF (t) is refunded debt in period t and
id (t) and ip (t)
are obtained from the schedule of current interest rates and
preferred dividends that are input parameters to the model.
Income
taxes are given by
ITAX
(t) = tr (t) · [EBIT (t)
− INT (t)] (B–20)
where
tr (t), the effective tax rate, is an input
parameter. The parameter tr (t) is based on taxes
paid plus deferred taxes.
Earnings to
common shareholders are earnings from operations less interest,
taxes, and preferred dividends, i.e.