1. At the end of the year, the Long Life Bulb Company announced that it had prod
ID: 2712254 • Letter: 1
Question
1. At the end of the year, the Long Life Bulb Company announced that it had produced a gross profit of $1,000,000. The company has also established that over the course of this year it has incurred $345,000 in operating expenses and $125,000 in interest expenses. The company is subject to a 30% tax rate and has declared $57,000 total preferred stock dividends.
a. How much are the earnings available for common stockholders?
b. Compute the increased retained earnings for 2003 if the company were to declare a $4.25 common stock dividend. The company has 15,000 shares of common stock outstanding.
Explanation / Answer
(a)
Net profits = (Gross profit - Operating expense - Interest expense) x (1 - Tax rate)
= $(1,000,000 - 345,000 - 125,000) x (1 - 0.3)
= $530,000 x 0.7
= $371,000
Earnings available to common stockholders = Net profit - Preferred dividend = $(371,000 - 57,000)
= $314,000
(b)
Total common stock dividend = $4.25 x 15,000 = $63,750
Total dividend = Preferred dividend + Common stock dividend = $(57,000 + 63,750) = $120,750
Increase in retained earnings = Net profit - Total dividend paid
= $(371,000 - 120,750)
= $250,250
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.