Multiple Choice
Dive Company maintains a policy to have a consistent payout ratio from year to year. Selected financial information for the company is as follows:
What amount of dividends would the company pay during the current year?
14. Financial Statement Analysis
Ratios: Payout Ratio
Struggling with Financial Accounting?
Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
Which of the following best defines the payout ratio in financial accounting?
A
The ratio of net income to total assets.
B
The ratio of cash dividends to total liabilities.
C
The ratio of retained earnings to total equity.
D
The ratio of cash dividends declared to net income.
Verified step by step guidance1
Understand the concept of the payout ratio: The payout ratio measures the proportion of net income that is distributed to shareholders as dividends. It is a key metric for assessing a company's dividend policy.
Identify the formula for the payout ratio: The formula is given as \( \text{Payout Ratio} = \frac{\text{Cash Dividends Declared}}{\text{Net Income}} \).
Analyze the options provided: Review each option to determine which one aligns with the definition and formula of the payout ratio.
Eliminate incorrect options: For example, 'The ratio of net income to total assets' refers to return on assets, not the payout ratio. Similarly, 'The ratio of cash dividends to total liabilities' and 'The ratio of retained earnings to total equity' do not match the payout ratio definition.
Select the correct answer: The correct definition of the payout ratio is 'The ratio of cash dividends declared to net income,' as it directly matches the formula and concept of the payout ratio.
Related Videos
Related Practice
Ratios: Payout Ratio practice set
Problem sets built by lead tutorsExpert video explanations