Question

Galehouse Gas Stations Inc. expects sales to increase from $1,510,000 to $1,710,000 next year. Galehouse believes that net assets (Assets − Liabilities) will represent 30 percent of sales. His firm has an 8 percent return on sales and pays 45 percent of profits out as dividends.

Answer 1

The net income will increase by 16,000 ,the dividends will increase by 7,200 and 8,800 increase in equity

Explanation:

Increase in sale for 200,000 (1,710,000-1,510,000)

Now, we calculate the increase in the net income

200,000 x 8% = 16,000 increase on net income

And now the increase in dividends

16,000 x 45% dividends payout ratio = 7,200 increase in dividends

With this we can relate to how much the retained earnings will grow based on this increase on sales:

16,000 - 7,200 = 8,800 increase in equity