Question

Calculating Retained earnings from pro forma Income consider the following income statement for the Heir Jorden corporation

Sales $49,000

Costs 40,300

Taxable incomes $8,700

Taxes 22% 1914

Net income $6,786

Dividends $2,400

Addition to retained earnings 4,386

A 20 % growth rate in sales is projected prepare a pro forma income statement assuming costs vary with sales and the dividend payout ratio is constant what is the projected addition to retained earnings?

Answer 1

Pro-forma Income statement for the Heir Jorden corporation for 1st year
	Amount ($)
Sales	$          49,000
Less: Cost of goods sold	$          40,300
Taxable Income	$            8,700
Less: Taxes (at 22%)	$            1,914
Net income	$            6,786
Dividends	$            2,400
Addition to retained earnings	$            4,386
Pro-forma Income statement for the Heir Jorden corporation for 2Nd year with 20% growth in sales
	Amount ($)
Sales	$          58,800
Less: Cost of goods sold	$          48,360
Taxable Income	$          10,440
Less: Taxes (at 22%)	$      2,296.80
Net income	$      8,143.20
Dividends (35.37%)	$      2,880.00
Addition to retained earnings	$      5,263.20

Company’s dividend payout ratio is constant for 1^st year and 2^nd year

The company's dividend payout ratio in 1^st year = Total dividend paid in first year / Net income in first year

= $2,400/ $6,786

= 0.3537 or 35.37%

Therefore dividend payout ratio for 2^nd year will be 35.37% of net income of 2^nd year

Therefore the projected addition to retained earnings is $5,263.20

Formula used in excel calculation: