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25 October, 21:40

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

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  1. 25 October, 23:15
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    It is $525,000.

    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.
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