Final answer:
To project the addition to retained earnings on a pro forma income statement with varying costs, calculate the net income after subtracting all costs and taxes, then apply the constant dividend payout ratio to find total dividends. Subtract these dividends from net income to identify the projected retained earnings.
Step-by-step explanation:
To project the addition to retained earnings, we need to calculate the after-tax income and then apply the dividend payout ratio.
Assuming we have a pro forma income statement with varying costs, the first step is to estimate the total revenue and subtract all the associated costs to get the operating income. From this operation income, we deduct taxes to obtain the net income.
As the dividend payout ratio is constant, we can apply this ratio to the net income to find out the total dividends that will be paid out. The retained earnings are the portion of net income that is not paid out as dividends and is instead retained by the company.
To find the addition to retained earnings, you would subtract the dividends from the net income. The formula to calculate this would be:
Addition to Retained Earnings = Net Income - (Dividend Payout Ratio × Net Income)
Remember, the projected retained earnings increase solely depends on the accuracy of the forecasts in the pro forma income statement and the actual realization of the estimated costs and revenue.
The constant dividend payout ratio implies that the portion of net income paid out as dividends remains the same, irrespective of the net income variation.