Suppose a firm has a dividend payout ratio of 25 percent and net income of $5 million. What would be the annual addition to retained earnings?

Question

Quizplus · Accepted Answer

The annual addition to retained earnings is calculated by subtracting the dividends paid out from the net income. With a dividend payout ratio of 25%, the firm pays out 25% of its $5 million net income as dividends, which is $1.25 million. Therefore, the addition to retained earnings is the remaining 75% of net income, which is $5 million - $1.25 million = $3.75 million.

Suppose a Firm Has a Dividend Payout Ratio of 25