Herman Corporation had net income of $100000 and paid dividends of $25000 to common stockholders and $20000 to preferred stockholders in 2021.Herman Corporation's common stockholders' equity at the beginning and end of 2021 was $450000 and $550000 respectively.Herman Corporation's payout ratio for 2021 is

Question

Quizplus · Accepted Answer

The payout ratio is the percentage of net income that is paid out as dividends.

Total dividends paid = $25,000 + $20,000 = $45,000

Net income = $100,000

Payout ratio = (total dividends paid/net income) x 100% 
= ($45,000/$100,000) x 100% 
= 45%

However, the question specifically asks for the payout ratio for common stockholders. Preferred dividends must be paid before common dividends, so we need to subtract the preferred dividends from the total dividends paid:

Common dividends paid = Total dividends paid - Preferred dividends 
= $45,000 - $20,000 
= $25,000

Common stockholders' equity at the beginning of the year = $450,000 
Common stockholders' equity at the end of the year = $550,000

Average common stockholders' equity = (beginning equity + ending equity)/2 
= ($450,000 + $550,000)/2 
= $500,000

Payout ratio for common stockholders = (common dividends paid/net income) x 100% 
= ($25,000/$100,000) x 100% 
= 25%

Therefore, the correct answer is B) 25%.

Herman Corporation Had Net Income of $100000 and Paid Dividends