Suppose the following information was taken from the 2014 financial statements of pharmaceutical giant Merck and Co. (All dollar amounts are in millions.)

Retained earnings, January 1, 2014 $43,698.8 Cost of goods sold 9,018.9 Selling and administrative expenses 8,543.2 Dividends 3,597.7 Sales revenue 38,576.0 Research and development expense 5,845.0 Income tax expense 2,267.6 Instructions

(a) After analyzing the data, prepare an income statement and a retained earnings statement for the year ending December 31, 2014.

(b) Suppose that Merck decided to reduce its research and development expense by 50%.

What would be the short-term implications? What would be the long-term implications?

How do you think the stock market would react?

AppendixLO1