-Kooshy Company wishes to maintain its dividend policy in the upcoming year.What will be the pro forma addition to retained earnings if sales are forecasted to increase 20% and all costs are proportional to sales?

Question

Quizplus · Accepted Answer

Since all costs are proportional to sales, an increase in sales by 20% will result in a 20% increase in total costs. Therefore, the addition to retained earnings will be the net income multiplied by (1 - dividend payout ratio). Since we are assuming a constant dividend policy, we can assume a constant dividend payout ratio. As a result, the increase in net income will be 20% of the current net income. Therefore, the pro forma addition to retained earnings will be: 
20% × current net income × (1 - constant dividend payout ratio)

Without knowing any specific numbers, we can conclude that choice D, $45, is the closest option to the calculated pro forma addition to retained earnings.

-Kooshy Company Wishes to Maintain Its Dividend Policy in the Upcoming