Choc-lattes Corp.earned $5.00 per share in 2006,and paid a dividend of $2.00 per share.If it earns $5.50 in 2007 and managers seek to increase the dividend to $2.75,its payout ratio will be

Question

Quizplus · Accepted Answer

The payout ratio is the percentage of earnings that are paid out as dividends. 
For 2006, the payout ratio was:
Payout ratio = Dividend per share / Earnings per share
Payout ratio = $2.00 / $5.00
Payout ratio = 0.4 or 40%
For 2007, if the earnings per share are $5.50 and the dividend per share is $2.75, then the payout ratio will be:
Payout ratio = Dividend per share / Earnings per share
Payout ratio = $2.75 / $5.50
Payout ratio = 0.5 or 50%
Therefore, the best choice is B, as the payout ratio will be 50%.

Choc-Lattes Corp