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 is calculated as follows:

Projected addition to retained earnings = Net income × (1 - Dividend payout ratio)

The dividend payout ratio is the proportion of earnings that are paid out as dividends to shareholders, while the remaining proportion is retained by the firm. Since we want to calculate the addition to retained earnings, we subtract the dividend payout ratio from 1 to get the retention ratio. The net income is multiplied by the retention ratio to get the projected addition to retained earnings. Choice B correctly represents this calculation.

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