PC Unlimited has net income of $350,000. The firm has 150,000 shares of common stock outstanding. The dividend for this year is $0.42 per share.
What is the retention ratio?
The retention ratio is the ratio of the net income reduced by the cash dividends, divided by the net income. The portion of net income that remains after paying the dividends, is referred to as retained earnings. These earnings are intended to be used as an internal source of finance by the company so as to reduce the cost of external financing in the future.
Answer and Explanation:
PC Unlimited's retention ratio is 82%.
As per the data:
- Net income = $350,000
- Annual dividend per share = $0.42
- Number of shares = 150,000 shares
- Retention ratio = (Net income - Dividends) / Net income
- Retention ratio = ($350,000 - ($0.42 * 150,000 shares) / $350,000
- Retention ratio = $287,000 / $350,000
- Retention ratio = 82%
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from Accounting 302: Advanced AccountingChapter 12 / Lesson 2