In a sales-driven pro forma analysis, net income grows from $1.2 million to $1.26 million. Assuming a dividend payout ratio of 40%, the increase in retained earnings is closest to (in $ millions):
B is correct. The retained earnings in a pro forma analysis increases by net income less dividends:
Dividend = Net income × Dividend payout ratio = $1.26 million ×40%= 0.504 million
Increase in retained earnings = $1.26 million - $0.504 million = 0.756 million
Or:
Increase in retained earnings = Net income × [1 - Dividend payout ratio]= $1.26 million × [1 - 40%] = 0.756 million.