EXERCISE 3: DISTRIBUTION OF THE PROFIT FOR THE YEAR Assume that a company earns $280,000 in profit for the year on $3 million in revenue.
The board of directors decides to keep half to pay for dividends and to reinvest the
rest in the company. Sixty percent of the retained earnings are invested in non-
current assets and the rest, in working capital for growth.
Questions
1. Calculate, as a percentage of revenue, how much would be kept in the
company for growth (i. e., working capital and non-current assets) and
how much would be used to pay dividends.
2. Explain who is responsible for deciding how much to retain in the
business and how much to pay in dividends.
3. What do you think the board of directors would do if the profit for
the year increased to $350,000?