Question

Mirrlees Furniture earned $750,000 last year and had a 30% payout ratio. How much did the firm add to its retained earnings?

Answer 1

Mirrlees Furniture paid out $225,000 in dividends from its $750,000 earnings since it has a 30% payout ratio. The remaining $525,000 was added to its retained earnings.

Step-by-step explanation:

Mirrlees Furniture earned $750,000 last year and had a 30% payout ratio. This means that the firm paid out 30% of its earnings as dividends. To calculate the amount added to retained earnings, we first need to determine the dividend paid and then subtract that from the total earnings.

The calculation for the dividends paid is as follows: $750,000 ×30% = $225,000. Consequently, the amount added to retained earnings is the earnings minus the dividends: $750,000 - $225,000 = $525,000. Therefore, Mirrlees Furniture added $525,000 to its retained earnings.

Answer 2

It is $525,000.

Step-by-step explanation:

If the payout ratio is 30% ,then retention rate will be 70%

Additional Retention = $750,000* 70%

=$525,000

Additional amount retained can be used for future business expansion and can also be used to buy back shares provided there is no available profitable investment project to invest in.

Here, the retention rate is very high which implies that the company has prospective investment to put the money into to generate additional returns.

Investors will therefore settle for capital appreciation resulting from increase in share price as result of additional earnings from profit plouged back into the business.