Please HELP In this week\'s discussion forum, you will 1.demonstrate your unders
ID: 2573682 • Letter: P
Question
Please HELP In this week's discussion forum, you will 1.demonstrate your understanding of the uses of net income, using most recent available information for your chosen company. 2.calculate dividend payout ratio and retention ratio for your chosen company. Please submit your brief analysis in narrative form. The narrative should describe to a lay person how your company has chosen to use its net income for the most recent year. It must also contain the dividend payout ratio and the retention ratio figures, along with an explanation for your reader about what these figures mean. You may not choose a company that has paid no dividends. Net income in this case will all be reinvested back into the company in the form of addition to retained earnings. Consequently, the purpose of the assignment will be defeated. You may not choose a company that has already been analyzed. If you like, please post your company name early on in this forum so no one else picks that company.
Explanation / Answer
Since no company is mentioned in a given question, we take an hypothetical example.
Suppose there is an X company, whose net profit for the year is $150 crore.
and its paid up capital is $10 crore comprising of 1 crore shares of $10 each. Now the company declares dividend of 150% which means $ 15 on each share (150% of $10)
hence, dividend would be $15 * 1 crore = $ 15 crore dividend.
Net profit is $150 crore.
Hence retained earnings would be Net Profit - Dividend.
i.e. = 150 crore - 15 crore = 135 crore.
Now Dividend payout ratio is what is the amount of dividend paid out of net profit . In this example it is 15 crore out of 150 crore which is 10%. (15/150 * 100)
Retention ratio is the amount which is invested back in company out of net profit earned. In this example it is 150-15 = 135 crore which is 90% (135/150 * 100)
Hence dividend payout ratio is 10% whereas retention ratio is 90%.