For a dividend paying firm,how is the projected addition to retained earnings calculated using the percentage of sales approach?
A)Net income × (1 - Retention ratio)
B)Net income × (1 - Dividend payout ratio)
C)(Cash dividends / Net income)× (New sales / Old sales)
D)(Retained earnings / Sales)× (New Sales / Old Sales)
E)Net income × (New Sales / Old Sales)

Question

Quizplus · Accepted Answer

The projected addition to retained earnings using the percentage of sales approach can be calculated as Net Income multiplied by (1 - Dividend Payout Ratio). The dividend payout ratio represents the percentage of earnings distributed as dividends, so subtracting it from 1 gives the percentage of earnings retained by the firm. Hence, option B is the correct choice.

For a Dividend Paying Firm,how Is the Projected Addition to Retained