2. At the end of the year, the Long Life Bulb Company announced that it had prod
ID: 2698518 • Letter: 2
Question
2. 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 is the earnings available for common stockholders?
(insert answer here)
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.
(insert answer here)
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
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