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14 February, 21:20

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.

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  1. 14 February, 21:47
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    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
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