Question 3 (a) part ii
Dividend payout ratio
2 marks
- Time to write
- About 4 minutes
From an older CBCS paper
Question
Question 3 (a) part ii · 2 marksExplain the following:
- Dividend Payout ratio
Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- ExplainEach point stated, then explained in a line or two.
Write it in this order
- 1 Meaning and formula, with retention ratio 1 mark 2 min
- 2 Use in the dividend decision 1 mark 2 min
Easy marks
- Step 1 opens with the meaning: a one-line definition, the quickest mark in it.
Try it first. About 4 minutes for 2 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Meaning. The dividend payout ratio is the proportion of the year's profits (earnings available to equity shareholders) distributed as dividends; the portion retained is the retention ratio.
- Dividend payout ratio = Dividend per share ÷ Earnings per share (or total equity dividend ÷ earnings available to equity shareholders);
- Retention ratio (b) = 1 − payout ratio.
For example, a company with a 40% payout ratio that earns ₹2 a share pays 80 paise a share.
Use. Deciding what portion of profit to distribute is the dividend decision itself: it depends on shareholders' preferences and the investment opportunities within the firm, and when the firm has profitable investment opportunities it is better to retain profits. A firm with a constant payout ratio pays a dividend that moves in proportion to earnings.
Where the 2 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Meaning and formula, with retention ratio | 1 |
| 2 | Use in the dividend decision | 1 |
| Total | 2 |
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