Question

Alpha Star's net income is $300 on $2,000 of sales. The company has $5,000 in assets and equity of $3,000. The firm paid out $125 in cash dividends. What is the dividend payout ratio?

Answer 1

Answer:

Dividend payout ratio = 41.67%

Explanation:

Dividend payout ratio is the amount that has to be paid to a company's shareholders relative to its net income.

We know,

Dividend payout ratio = Cash dividend ÷ (Net Income + Non cash expenses - Non cash sales)

Given,

Net Income = $300

Cash dividend = $125

The company does not have any non-cash expenses or sales. Therefore,

Dividend payout ratio = $125 ÷ $300

Dividend payout ratio = 0.4167

or Dividend payout ratio = 41.67%

Therefore, the company pays almost 42% of net income to its shareholders.