A firm cuts its dividend payout ratio. as a result, you know that the firm's ---earnings retention ratio will increase.
What is meant by payout ratio?
The payout ratio shows the proportion of earnings a company pays its shareholders in the form of dividends, expressed as a percentage of the company's total earnings. The calculation is derived by dividing the total dividends being paid out by the net income generated.
How is payout ratio calculated?
Payout Ratio = Total Dividends / Net Income
The payout ratio formula can also be expressed as dividends per share divided by earnings per share (EPS).
What is earning retention ratio?
The earnings retention ratio, also known as the plowback ratio, is the percentage of net income a company keeps as retained earnings after dividend payments are doled out.
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