Question

Omega Inc. expects its net income to be $525,000 this year. The firm's dividend payout ratio is 60 percent. The firm is financed with 30 percent debt, and it has no preferred stock outstanding. What is the retained earnings break point for Omega Inc.?

Answer 1

Answer: $700,000

Explanation: Retained earnings is the amount of earnings left with the company after paying for dividends of common stockholders.

Retained earnings break even can be computed as follows :-

$Break\:even=\frac{retained\:earnings}{equity\:ratio}$

where,

retained earnings = net income (1- payout ratio)

                              = $525,000 (1 - 60%)

                              =  $210,000

therefore,

$Break\:even=\frac{210,000}{0.3}$

=$700,000