Question

Using the Income Statement below, what is the Retention Ratio?

Sales                                                                $28,400

Cost of Goods Sold                                          21,200

Gross Profit                                                        $7,200

Depreciation                                                      2,700

Earnings before Interest and Taxes $4,500

Interest Expense                                                     850

Taxable Income                                                $3,650

Net Income                                                        $2,250

Dividends Paid                                                   $660

State your answer in percentage format with two decimal places.

Answer 1

Retention Ratio

Retention Ratio is calculated by using the following formula

Retention Ratio = 100% – Dividend Pay-out Ratio

Dividend Pay-out Ratio = (Dividend Paid / Net Income) x 100

= ($660 / $2,250) x 100

= 29.33%

Retention Ratio = 100% – Dividend Pay-out Ratio

= 100% - 29.33%

= 70.67%

It can also be calculated by using the following way

Retention Ratio = [(Net Income - Dividend Paid) / Net Income] x 100

= [($2,250 - $660) / $2,250] x 100

= [$1,590 / $2,250] x 100

= 70.67%

“Therefore, the Retention Ratio would be 70.67%”