The payout ratio is computed by dividing cash dividends declared on common stock by

Question

Quizplus · Accepted Answer

The payout ratio measures the percentage of earnings paid out to shareholders as cash dividends. Therefore, the numerator should be the cash dividends declared on common stock, which is a distribution of earnings to shareholders. The most appropriate denominator is net income, as it represents the earnings available to shareholders after all expenses are paid. Therefore, the correct formula for the payout ratio is: Cash dividends declared on common stock / Net income.

The Payout Ratio Is Computed by Dividing Cash Dividends Declared