What is the percentage of a firm's earnings that is distributed to shareholders called?
a. Payout ratio
b. Distribution percentage
c. Retention ratio
d. Dividend portion
e. Outflow ratio
Retained Earnings and Dividend Payment:
A firm's net income is the profit earned after deducting all expenses, including interest and taxes. Net income represents profit available to shareholders, which could be distributed as dividends or retained by the firm to increase equity value.
Answer and Explanation:
The answer is a).
The distribution of earnings to shareholders are called dividends. The percentage of earnings that are paid out as dividends is called the dividend payout ratio, which is calculated as:
- dividend payout ratio = dividend payment / net income
Relatedly, the retention ratio is one minus the dividend payout ratio, which represents the share of earnings that is retained by the firm instead of paying out as dividends.
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from Finance 101: Principles of FinanceChapter 16 / Lesson 1