Question

At the end of 2013, Company B has retained earnings of $13,500,000. During 2014 the company earns pre-tax income of $7,000,000. Historically, the company has not paid dividends. However, in December, 2014, the company announces a change in dividend policy whereby beginning in 2015 it will pay $0.15 per share on 3,000,000 outstanding shares, to be paid in January, 2015. The company has a marginal tax rate of 40% and a corporate tax rate of 30%. What is Company B's retained earnings at the end of 2014

Answer 1

Company B's retained earnings at the end of 2014 is $17,250,000.

Retained earnings

Using this formula

Retained earnings=Retained earnings +Pre-tax income×(1-Marginal tax rate)-Price per share× Outstanding shares

Let plug in the formula

Retained earnings=$13,500,000+($7,000,000× (1 - 40%))- ($0.15 × 3,000,000)

Retained earnings=$13,500,000 + $4,200,000- $450,000

Retained earnings= $17,250,000

Therefore Company B's retained earnings at the end of 2014 is $17,250,000.

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