Answer:
Here we have two cases and in one of these we are paying interest on a normal loan which is tax deductible and in the other case we are paying interest on a preference share which is not Tax allowable expense. So in the nutshell, the only difference will be tax amount computed in both cases for calculating Earnings available for ordinary shareholders.
Case 1. Interest paid on normal loan
Earning After tax = (Earnings before Interest & Tax - Interest) - Tax
Earning After tax = ($50,000 - 12000) - 21%
Earning After tax = $38000 - 21%*$38000
Earning After tax = $30020
The amount available for the ordinary shareholders is $300,20
Case 2. Interest on preference shares
As the interest paid on preference share is not tax deductible so the tax will be calculated as 21% of the amount $50,000. So
Earning After tax = Earnings before Interest & Tax - Interest - Tax
Earning After tax = $50,000 - 12000 - (21%*$50,000)
Earnings After Tax = $38,000 - $10,500 = $27,500
So the amount available for the ordinary shareholders is $27,500.
