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.
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%”
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