Allison Engines Corporation has established a target capital structure of 40 percent debt and 60 percent common equity. The firm expects to earn $150,000 in after-tax income during the coming year, and it will retain 40 percent of those earnings. What is the break point of retained earnings?
A) $125,000
B) $100,000
C) $150,000
D) $110,000
E) $135,000

Question

Quizplus · Accepted Answer

The break point of retained earnings is calculated by dividing the retained earnings by the equity portion of the target capital structure. Retained earnings are 40% of $150,000, which is $60,000. The equity portion is 60%, so the break point is $60,000 / 0.60 = $100,000.

Allison Engines Corporation Has Established a Target Capital Structure of 40