Question

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?

Answer 1

The break point of retained earnings for Allison Engines Corporation is $100,000 in new financing, which is the point after which the company will need to issue new common stock for any additional financing.

Step-by-step explanation:

The break point of retained earnings is the level of financing at which new common stock must be issued because the internal financing from retained earnings is exhausted. Allison Engines Corporation expects to earn $150,000 in after-tax income and will retain 40% of these earnings. To find the break point of retained earnings, we should calculate the total amount of new financing that can be supported by the retained earnings before new common stock is needed. The break point formula is given by:

Break Point = Retained Earnings / Common Equity Proportion

So, the break point is:

Break Point = ($150,000 × 40%) / 60%

Break Point = $60,000 / 0.6

Break Point = $100,000

Therefore, the break point for Allison Engines Corporation is $100,000 in new financing.

Answer 2

Answer: $100,000

Explanation: Allison engines corporation has a profit of $150,000 after Tax.

Rate of retained earning : 40%

Retained earnings : $150,000 × 40% = $60,000

Percentage of equity in the capital is 60%

Break even point of retained earnings = Retained Earnings ÷ Percentage of equity in the capital

Break even point of retained earnings = $60,000 ÷ 0.6

Break even point of retained earnings = $100,000