Question

At the end of 2019, Long Life Light Bulb Corporation announced a gross profit of $1 million. The company has also established that over the course of this year that it has incurred $345,000 in operating expenses and $125,000 in interest expenses. The company is subject to a 21% tax rate, and has declared $57,000 of total preferred stock dividends.

a) calculate the earnings available for common stockholders

b) compute the increased retained earnings for 2019 if the company were to declare a $4.25 common stock dividend. The company has $15,000 shares of common stock outstanding

Answer 1

At the end of 2019, Long Life Light Bulb Corporation announced a gross profit of $1 million. The company has also established that over the course of this year that it has incurred $345,000 in operating expenses and $125,000 in interest expenses. The company is subject to a 21% tax rate, and has declared $57,000 of total preferred stock dividends.

a) calculate the earnings available for common stockholders

earnings available for common stockholders = Income available to common stockholders (IAC)

calculation of IAC = Gross profit - operating expenses - interest exp. - tax exp - preferred dividend

Gross profit	$ 1000000
- Operating exp.	($345,000)
= Operating income	$ 6550000
- Interest expenses	($ 125000)
Earning befor tax	$ 530000
-Tax @ rate 21% = 530000 * 21%	($ 111300)
Net income	$ 418700
-Preferred dividend	($ 57000)
= Eraning Available to Common Stock holders(EAC)	$ 361000

earnings available for common stockholders = $ 361000

b) compute the increased retained earnings for 2019 if the company were to declare a $4.25 common stock dividend. The company has $15,000 shares of common stock outstanding

Total common stock dividend declared = $ 4.25 * 15000 = $ 63750

Increased Retained earning = earnings available for common stockholders - common stock dividend declared

Increased Retained earning = 361000 - 63750 = 297250

increased retained earnings for 2019 = $ 297250