Question

A company's retained earnings balance at the end of the current year is $704,360. During the year, the company had net income of $140,840, and new capital spending of $169,120. The company uses a debt-to-equity ratio of 2.20 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?

Answer 1

debt-to-equity ratio=Debt/equity

Hence debt=2.20*Equity

Let equity be $100

Debt=$220

Total assets=Total liabilities+Total equity

=220+100

=$320

Hence weight of equity =100/320

=0.3125

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

=140,840-(169,120*0.3125)

=87990

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

704,360=Beginning retained earnings+140,840-87990

Beginning retained earnings=704,360+87990-140,840

=$651510