Question

Elliot's garage currently has sales of $886,810, a tax rate of 32%, a dividend payout ratio of 40%, and expenses excluding taxes of $753,690. What is the anticipated increase to retained earnings if sales are expected to increase by 8.50%, and expenses excl. taxes are proportional to sales? $57,456 $58,930 $60,403 $61,876 $63,349

Answer 1

Given,

Sales = $886810

Tax rate = 32% or 0.32

Dividend payout ratio = 40% or 0.40

Expenses = $753690

Increasing rate = 8.50% or 0.085

Solution :-

Expected sales = sales x (1 + increasing rate)

= $886810 x (1 + 0.085)

= $886810 x 1.085 = $962188.85

Expected expenses = Expected sales x expenses/sales

= $962188.85 x $753690/$886810 = $817753.65

Expected income = (expected sales - expected expenses) x (1 - tax rate)

= ($962188.85 - $817753.65) x (1 - 0.32)

= $144435.20 x 0.68 = $98215.94

Now,

Anticipated increase to retained earnings = Expected income x (1 - dividend payout ratio)

= $98215.94 x (1 - 0.40)

= $98215.94 x 0.60 = $58930