The Corner Store has sales of $68,900, dividends of $1,960, and net income of $4,900. The firm is expecting sales to decrease by 3 percent next year while the profit margin remains constant. The firm wants to increase the dividend payout ratio by a fixed 2.5 percent. What is the projected increase in retained earnings for next year?

Question

Quizplus · Accepted Answer

First, we need to calculate the current dividend payout ratio:
Dividend payout ratio = Dividends / Net Income = 1,960 / 4,900 = 0.4 = 40%

Next, we can use the constant profit margin to find the net income for next year:
Net income for next year = (1 - 0.03) x $4,900 = $4,753

Then, we can use the desired dividend payout ratio to find the dividends for next year:
Dividend payout ratio = dividends / net income = (1,960 + X) / $4,753
0.425 = (1,960 + X) / $4,753
X = $2,733

Finally, we can calculate the projected increase in retained earnings for next year:
Retained earnings for next year = Net income for next year - dividends for next year
Retained earnings for next year = $4,753 - ($1,960 + $2,733) = $60

Therefore, the projected increase in retained earnings for next year is $60 or approximately $2,733. The answer is C.

The Corner Store Has Sales of $68,900, Dividends of $1,960