In: Finance
The Income Statement of XYZ Company for the most recent fiscal year is given below. Its sales are projected to increase by 20% in the coming year and it always retains 60% of its net income. Use the percentage of sales method to find out the addition to retained earnings amount.
Sales $40,000
Operating costs 30,000
Earnings before interests and taxes $10,000
Interest expenses 1,000
Earnings before taxes $ 9,000
Taxes (40%) 3,600
Net income $ 5,400
Growth rate = 20%
Retention ratio = 60%
Payout ratio = 1 - Retention ratio
Payout ratio = 1 - 0.60
Payout ratio = 0.40
Coming Year:
Sales = $40,000 + 20% * $40,000
Sales = $48,000
Operating costs = $30,000 + 20% * $30,000
Operating costs = $36,000
Earnings before interest and taxes = Sales - Operating
costs
Earnings before interest and taxes = $48,000 - $36,000
Earnings before interest and taxes = $12,000
Interest expenses = $1,000
Earnings before taxes = Earnings before interest and taxes -
Interest expenses
Earnings before taxes = $12,000 - $1,000
Earnings before taxes = $11,000
Taxes = 40% * Earnings before taxes
Taxes = 40% * $11,000
Taxes = $4,400
Net income = Earnings before taxes - Taxes
Net income = $11,000 - $4,400
Net income = $6,600
Dividends = 40% * Net income
Dividends = 40% * $6,600
Dividends = $2,640
Addition to retained earnings = Net income - Dividends
Addition to retained earnings = $6,600 - $2,640
Addition to retained earnings = $3,960