Question

We know that the dividend payout ratio for a company is 65%.What will be happen to the retained earnings if company increases its dividend payout ratio by 10%?

Answer 1

Answer

a. Dividend Payout ratio = Dividend paid / Net Income = 65%

Net Income = 154% of Dividend Paid

b. Dividend Payout ratio = Dividend paid / Net Income = 75%

Net Income = 133% of Dividend Paid

Since with increase in Dividend payout ratio in b above, the Net Income transferred to Retained Earnings decreases, hence the ending balance of retained earnings of company will decrease, with increase in dividend payout ratio by 10%