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Roy's Markets has net income of $164,000. The firm has 200,000 shares of common stock...

Question:

Roy's Markets has net income of $164,000. The firm has 200,000 shares of common stock outstanding. The dividend for this year is $0.61 per share.

What is the retention ratio?

Additions to Retained Earnings:

A company distributes dividends to its shareholders out of the net profits earned during the period as per the dividend payout policy. The remaining net income after distributing dividends is added to the retained earnings of the company which will be used for reinvestments in the future. Every year additions to retained earnings are made and the ratio of the additions to net income is the retention ratio.

Answer and Explanation:


Answer:

Roy's Market's retention ratio is 25.61%.

Explanation:

Roy's has provided the following data:

  • Net income = $164,000
  • Number of shares = 200,000 shares
  • Annual dividend per share = $0.61

Computation:

The first step is to determine the annual dividend:

  • Annual dividend = Number of shares * Annual dividend per share
  • Annual dividend = 200,000 shares * $0.61
  • Annual dividend = $122,000

The second step is to determine the retention ratio:

  • Retention ratio = (Net income - Dividends) / Net income
  • Retention ratio = ($164,000 - $122,000) / $164,000
  • Retention ratio = $42,000 / $164,000
  • Retention ratio = 25.61%

Learn more about this topic:

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Impact of Dividend Distribution on Retained Earnings

from Accounting 302: Advanced Accounting

Chapter 12 / Lesson 2
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