Dave's Lumber earned $120 million last year and retained $72 million. What is his payout ratio?

Question:

Dave's Lumber earned $120 million last year and retained $72 million. What is his payout ratio?

Dividend Payout Ratio:

The investors in the common stock of the company expect returns on their investments. The returns are in the form of dividends declared by the company on its earnings of its bottom-line. The company pays some portion of its net income as a dividend (dividend payout ratio) and keeps balance as reserves to take care of the future growth of the company.

Answer and Explanation:

Dividend payout ratio is 0.40 or 40%

Explanation

  • The net income is $120 million
  • The amount transferred to reserve account is $72 million
  • Dividends paid= net income - amount transferred to reserve account
    =$120 - $72
    =$48

Dividend payout ratio = dividend / net income = 48 / 120 = 0.40 or 40%


Learn more about this topic:

What is a Dividend Policy? - Overview, Components & Goal
What is a Dividend Policy? - Overview, Components & Goal

from Chartered Financial Analyst (CFA): Exam Prep & Study Guide

Chapter 9 / Lesson 6
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