Calculate retention ratio given the following information: EBIT $150,000; interest expense $16,000; tax rate 30%; dividends paid $40,000.

Question

Quizplus · Accepted Answer

The retention ratio is calculated as the portion of net income that is retained in the business rather than paid out as dividends. First, calculate the net income: EBIT - Interest = Earnings Before Taxes (EBT); EBT - Taxes = Net Income. So, $150,000 - $16,000 = $134,000 (EBT); $134,000 * (1 - 0.30) = $93,800 (Net Income). Retention ratio = (Net Income - Dividends) / Net Income = ($93,800 - $40,000) / $93,800 = $53,800 / $93,800 = 57.36%.

Calculate Retention Ratio Given the Following Information: EBIT $150,000; Interest