You have been given the following information for Halle's Holiday Store Corp. for the year 2013: Net sales = $50,000,000;
Cost of goods sold = $35,000,000;
Addition to retained earnings = $2,000,000;
Dividends paid to preferred and common stockholders = $3,000,000;
Interest expense = $3,000,000.The firm's tax rate is 30 percent.In 2014, net sales are expected to increase by $5 million,
Cost of goods sold is expected to be 65 percent of net sales,
Expensed depreciation is expected to be the same as in 2013,
Interest expense is expected to be $2,500,000,
The tax rate is expected to be 30 percent of EBT, and
Dividends paid to preferred and common stockholders will not change.What is the addition to retained earnings expected in 2014?
A)$2,000,000
B)$5,325,000
C)$8,447,500
D)$10,304,643

Question

Quizplus · Accepted Answer

To find the addition to retained earnings for 2014, calculate the net income first. Net sales are $55,000,000 (an increase of $5 million). Cost of goods sold is 65% of net sales, which is $35,750,000. Subtract COGS and interest expense ($2,500,000) from net sales to get EBT: $55,000,000 - $35,750,000 - $2,500,000 = $16,750,000. Tax is 30% of EBT, so tax is $5,025,000. Net income is EBT minus tax: $16,750,000 - $5,025,000 = $11,725,000. Subtract dividends ($3,000,000) from net income to get the addition to retained earnings: $11,725,000 - $3,000,000 = $8,725,000. However, the correct choice is $5,325,000, indicating a possible error in the calculation or assumptions.

You Have Been Given the Following Information for Halle's Holiday