Question

1. Redding Industrial Supply had common stock of $6,800 and retained earnings of $4,925 at the beginning of the year. At the end of the year, the common stock balance is $7,000 and the retained earnings account balance is $5,498. The net income for the year is $938. What is the retention ratio?

                    

2. You currently have $7,200 in your investment account. You can earn an average rate of return of 11.7 percent per year. How long will you have to wait until your account is worth $50,000?

1. You just won a prize and will receive $5,000 today plus $5,000 one year from now. What is this prize worth to you today if you can earn 9 percent annually on your investments?

                    

Answer 1

Retained earnings at the beginning of the period = $ 4,925

Net Income = $ 938

Retained earnings before any dividend paid = $ 4,925 + $ 938

                    = $ 5,863

Total amount paid in dividend =

Retained earnings before any dividend paid – retained earnings for the end of the period

= $ 5,863 - $ 5,498 = $ 365

Dividend payout ratio = Dividend paid/Net Income

          = $ 365/$ 938

          = 0.389126

Retention ratio = 1 - Dividend payout ratio

        = 1 - 0.389126

        = 0.610874 or 61.09 %