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Tom's Drums has net income of $1,000,000. The firm has 300,000 shares of common stock...

Question:

Tom's Drums has net income of $1,000,000. The firm has 300,000 shares of common stock outstanding. The dividend for this year is $0.88 per share.

What is the retention ratio?

Retention Ratio:

Retention ratio is the percentage of earnings a firm retains instead of paying out as dividends. Retained earnings will increase the total equity value of a firm, all else the same.

Answer and Explanation:

Retention ratio is one minus the dividend payout ratio, which is the dividend per share divided by the earnings per share, i.e.,

  • dividend payout ratio = 0.88 / (1,000,000 / 300,000)
  • dividend payout ratio = 26.4%

The retention ratio = 1 - dividend payout ratio = 1 - 26.4% = 73.6%.


Learn more about this topic:

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