Question

The firm X has sales of $420,000, a tax rate of 32%, a payout ratio of 35%, and a net profit margin of 6%. What is the addition to retained earnings?

a. $60,060
b. $67,200
c. $79,200
d. $82,620

Answer 1

The addition to retained earnings for Firm X is calculated as $11,138.40 by taking 6% of the sales as net income, adjusting for a 32% tax rate, and considering a 35% payout ratio. This value is not listed in the provided options.

Step-by-step explanation:

To determine the addition to retained earnings for Firm X, we first need to calculate the net income by applying the net profit margin to the sales figure, then account for taxes, and finally apply the payout ratio to determine how much of the net income is retained in the business.

• Net Income: Sales * Net Profit Margin = $420,000 * 0.06 = $25,200
• After-Tax Net Income: Net Income * (1 - Tax Rate) = $25,200 * (1 - 0.32) = $25,200 * 0.68 = $17,136
• Addition to Retained Earnings: After-Tax Net Income * (1 - Payout Ratio) = $17,136 * (1 - 0.35) = $17,136 * 0.65 = $11,138.40

Thus, the addition to retained earnings is $11,138.40, which is not one of the provided options indicating a possible error in the question's choices or the need for further clarification.