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 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%.
Become a member and unlock all Study Answers
Try it risk-free for 30 daysTry it risk-free
Ask a question
Our experts can answer your tough homework and study questions.Ask a question Ask a question
Learn more about this topic:
from Finance 101: Principles of FinanceChapter 16 / Lesson 1