your firm has a constant profit margin of 5 percent and adividend payout ratio of...

your firm has a constant profit margin of 5 percent and a dividend payout ratio of 35 percent. currently, sales, net income, and retained earnings are 27400, 2350, 4400, respectively. if sales are expected to rise by 5 percent next year, what will be the pro forma retained earnings?

A) 5264 B) 5721 C )6004 D) 1604 E) 864

Expert Solution

Current Net Income = $2350

Since, the firm has a constant profit margin of 5 percent and sales Increase by 5%. So, in case of constant profit Margin the % increase in sale will same for % increase for Net Income

Net Income will increase by 5%

Forecasted net income = $2350*(1+5%) = $2467.50

Forecasted additions to retained earnings = Forecasted net income*(1- Dividend payout ratio)

= $2467.50*(1-0.35) = $1604

- Pro forma retained earnigs = Current Retained earnings + Forecasted additions to retained earnings

Pro forma retained earnigs = $4400 + $1604

Pro forma retained earnigs = $6004

Option C

jeff jeffy answered 2 years ago

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