The Cookie Shoppe expects sales of $500,000 next year at a 5% pretax profit margin and an average tax rate of 35%. If it chooses to pay out 30% of its earnings as dividends, what is the projected increase in retained earnings
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To calculate the projected increase in retained earnings, we need to determine the net income, dividends, and the difference between them.
1. Calculate net income:
Net Income = Sales x Profit Margin
Net Income = $500,000 x 0.05
Net Income = $25,000
2. Calculate taxes:
Taxes = Net Income x Tax Rate
Taxes = $25,000 x 0.35
Taxes = $8,750
3. Calculate retained earnings:
Retained Earnings = Net Income - Taxes
Retained Earnings = $25,000 - $8,750
Retained Earnings = $16,250
4. Calculate dividends:
Dividends = Net Income x Dividend Payout Ratio
Dividends = $25,000 x 0.30
Dividends = $7,500
5. Calculate the projected increase in retained earnings:
Projected Increase in Retained Earnings = Retained Earnings - Dividends
Projected Increase in Retained Earnings = $16,250 - $7,500
Projected Increase in Retained Earnings = $8,750
Therefore, the projected increase in retained earnings for the Cookie Shoppe is $8,750.