Final answer:
The retained earnings breakpoint for Sunny Day Manufacturing Company is calculated using its expected addition to earnings, $420,000, and the fraction of equity in its capital structure, 60%.
Step-by-step explanation:
The retained earnings breakpoint is a financial concept that can be used to analyze Sunny Day Manufacturing Company’s capacity to finance new projects with retained earnings before needing to issue new equity.
To calculate the retained earnings breakpoint, we consider the company's addition to earnings, which is expected to be $420,000 for this year, and its target capital structure, which consists of 60% equity.
The breakpoint is the point at which the company's retained earnings are fully utilized, and new equity needs to be issued to maintain the capital structure. The formula for this calculation is Retained Earnings Breakpoint = Addition to Retained Earnings / Fraction of Equity in the Capital Structure, which in this case is $420,000 / 0.60.This represents the level of investment Sunny Day can finance with retained earnings before needing additional equity.