Question

A company's retained earnings balance at the end of the current year is $799,060. During the year, the company had net income of $159,740, and new capital spending of $191,820. The company uses a debt-to-equity ratio of 2.70 for the capital spending and strictly adheres to a residual dividend policy. What was the retained earnings balance at the beginning of the current year?

	$728,536
	$747,217
	$765,897
	$784,578
	$803,258

Answer 1

Debt-equity ratio=Debt/Equity

Hence debt=2.7*Debt

Let equity be $100

Let Debt=$270

Total assets=Total liabilities+Total equity

=(270+100)=$370

Weight of equity=(100/370)

=0.27027027

Dividend payout=Net income-(Capital budget*Weight of equity)

=159740-(0.27027027*191,820)

=107896.757(Approx)

Ending retained earnings=Beginning retained earnings+Net income-Dividend payout

799,060=Beginning retained earnings+159740-107896.757

Beginning retained earnings=(799,060+107896.757-159740)

=$747217(Approx)