Question

Compute the 2016 forecast Retained Earnings Balance

Assume a forecast asset turnover ratio of 0.75 in 2016 that will grow by .05 turns in each of the following 4 years and then will stabilize after that. The projected sales growth is 12.2% in 2016, 12.9% in 2017, 10.2% in 2018, 9.2% in 2019 and then 6.5% thereafter for AMAT. The forecast 2016 gross profit margin is 40.5% and it is budgeted to drop by 0.5% per year until it reaches at target 39% level. Finally, assume that net profit margin is forecast to be 10% for the next 5 years. Assume a stable net profit margin of 13% and a dividend payout ratio of 35%

Answer 1

To calculate, 2016 forecasted Retained earnings, we will use the following formula

2016 Retained earnings = Net profit (2016) - Dividents paid (2016)

Assuming 100 to be the sales in 2015 (You can take actual value, if given)

Sales= 100 (2015)
Given: Projected sales growth in 2016 = 12.2%

Therefore, Sales in 2016 = Sales in 2015 * (100+Sales growth)/100 = 100 * (100+12.2)/100 = 112.2
Sales in 2016 = 112.2

Net profit margin is to be taken 10 % for the next 5 year
Hence, Net profit (2016) = Net profit Margin * Sales in 2016 = (10 * 112.2)/100 = 11.22

Given: Dividend payout ratio = 35%
Dividend payout ratio = Dividends paid/ Net profit = Dividends paid/ 11.22
Dividends paid (2016) = (35*11.22) / 100 = 3.927

2016 Retained earnings = Net profit (2016) - Dividents paid (2016)

2016 Retained earnings = 11.22 - 3.927 = 7.293