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23. A company's retained earnings balance at the end of the current year is $865,350. During...

23. A company's retained earnings balance at the end of the current year is $865,350. During the year, the company had net income of $172,970, and new capital spending of $207,710. The company uses a debt-to-equity ratio of 3.05 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?

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Answer #1

Debt to equity ratio=Debt/Equity

Debt=3.05*Equity

Let Equity be $100

Debt=3.05*100

=$305

Total assets=Total liabilities+Total equity

=305+100

=$405

Hence weight of equity =100/405

=0.24691358

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

=172,970-(0.24691358*207,710)

=121683.58

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

865,350=Beginning retained earnings+172,970-121683.58

Beginning retained earnings=865,350+121683.58-172,970

=$814063.58(Approx)

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