You have been given the following information for Halle's Holiday Store Corp. for the year 2017: 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 2018, 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 2017, 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 2018?
A) $2,000,000
B) $5,325,000
C) $8,447,500
D) $10,304,643

Question

Quizplus · Accepted Answer

To calculate the addition to retained earnings for 2018, follow these steps:1. Calculate Net Sales for 2018: $50,000,000 + $5,000,000 = $55,000,000.2. Calculate Cost of Goods Sold (COGS) for 2018: 65% of Net Sales = 0.65 * $55,000,000 = $35,750,000.3. Gross Profit = Net Sales - COGS = $55,000,000 - $35,750,000 = $19,250,000.4. Operating Income = Gross Profit - Operating Expenses. Since depreciation is the same and there's no mention of other operating expenses changing, we assume Operating Income = Gross Profit for simplicity, as we can't calculate depreciation directly from the given information.5. Earnings Before Taxes (EBT) = Operating Income - Interest Expense = $19,250,000 - $2,500,000 = $16,750,000.6. Taxes = 30% of EBT = 0.30 * $16,750,000 = $5,025,000.7. Net Income = EBT - Taxes = $16,750,000 - $5,025,000 = $11,725,000.8. Addition to Retained Earnings = Net Income - Dividends = $11,725,000 - $3,000,000 = $8,725,000.However, none of the options exactly match the calculated figure of $8,725,000. Given the options provided and the calculation process, it seems there might have been a mistake in the calculation or interpretation of the options. Based on the closest match principle and considering potential miscalculations or misunderstandings in the question's constraints (like depreciation not explicitly subtracted due to lack of data), the correct answer intended might be different. Given the discrepancy, the closest match principle would suggest an answer, but without a precise match, this explanation highlights the calculation process based on the provided data. It's important to review all steps and assumptions in financial calculations for accuracy.

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