Question

Allison engines corporation has established a target capital structure of 40 percent debt and 60 percent common equity. the firm expects to earn $150,000 in after-tax income during the coming year, and it will retain 40 percent of those earnings. what is the break point of retained earnings?

Answer 1

Answer: $100,000

Explanation: Allison engines corporation has a profit of $150,000 after Tax.

Rate of retained earning : 40%

Retained earnings : $150,000 × 40% = $60,000

Percentage of equity in the capital is 60%

Break even point of retained earnings = Retained Earnings ÷ Percentage of equity in the capital

Break even point of retained earnings = $60,000 ÷ 0.6

Break even point of retained earnings = $100,000