A Montreal ﬁrm currently has sales of $864,000, a 34% marginal tax rate, and a dividend payout ratio of 55%. Costs equal 85% of sales. What is the anticipated increase to retained earnings if sales
Are expected to increase by 6%?

Question

Quizplus · Accepted Answer

First, we need to find the amount of earnings retained by the firm:
Earnings before taxes = Sales - costs = $864,000 - 0.85($864,000) = $129,600
Taxes = Marginal tax rate x Earnings before taxes = 0.34 x $129,600 = $44,064
Net earnings after taxes = Earnings before taxes - Taxes = $129,600 - $44,064 = $85,536
Dividends = Dividend payout ratio x Net earnings after taxes = 0.55 x $85,536 = $47,045.80
Retained earnings = Net earnings after taxes - Dividends = $85,536 - $47,045.80 = $38,490.20

Next, we need to calculate the anticipated increase in retained earnings if sales are expected to increase by 6%:
Expected increase in sales = 6% x $864,000 = $51,840
Expected increase in earnings before taxes = 6% x $129,600 = $7,776
Expected increase in net earnings after taxes = (1 - Marginal tax rate) x Expected increase in earnings before taxes
= (1 - 0.34) x $7,776 = $5,129.44
Expected increase in dividends = Dividend payout ratio x Expected increase in net earnings after taxes
= 0.55 x $5,129.44 = $2,821.19
Expected increase in retained earnings = Expected increase in net earnings after taxes - Expected increase in dividends
= $5,129.44 - $2,821.19 = $2,308.25

Finally, we can calculate the anticipated total retained earnings:
Anticipated retained earnings = Retained earnings + Expected increase in retained earnings
= $38,490.20 + $2,308.25 = $40,798.45

Therefore, the answer is B) $40,801.

A Montreal ﬁRm Currently Has Sales of $864,000, a 34