The retention ratio is:
A) equal to net income divided by the change in total equity.
B) the percentage of net income available to the firm to fund future growth.
C) equal to one minus the asset turnover ratio.
D) the change in retained earnings divided by the dividends paid.
E) the dollar increase in net income divided by the dollar increase in sales.
F) None of the above.

Question

Quizplus · Accepted Answer

The retention ratio is the percentage of net income that is retained by the firm to fund future growth, rather than being paid out as dividends to shareholders. Option A calculates the return on equity, but does not relate to the retention ratio. Option C is not correct as there is no direct relationship between asset turnover ratio and retention ratio. Option D calculates the retention ratio, but only for one period, without considering the change in dividends paid over time. Option E calculates the profit margin, not the retention ratio.

The Retention Ratio Is