Question

Consider a company whose earnings every year represent 5% of its book value of equity. If
dividends are constant, what fraction of earnings are retained every year?

Answer 1

Answer:

Retention Ratio = $\frac{(Retained Earnings)}{(Net Income)}$

Where,

Retained Earnings = Beginning Period of Retained Earnings + Net Income (or Loss) – Cash Dividends – Stock Dividends.

Alternative Formula:

Retention Ratio = $\frac{Net Income-Dividends Distributed}{Net Income}$

Explanation:

A dividend is the dissemination of a part of the organization's profit, chose and oversaw by the organization's top managerial staff, and paid to a class of its investors. Dividends must be affirmed by the investors through their democratic rights. In spite of the fact that money dividends are the most well-known, dividends can likewise be given as portions of stock or other property. Alongside organizations, different shared assets and trade exchanged assets (ETF) likewise deliver dividends.

Equity is ordinarily alluded to as investor equity (otherwise called investors' equity) which speaks to the measure of cash that would be come back to an organization's investors if the entirety of the benefits were sold and the entirety of the organization's obligation was paid off. Equity is found on an organization's asset report and is one of the most widely recognized money related measurements utilized by examiners to evaluate the budgetary wellbeing of an organization.

The retention ratio is the extent of profit held back in the business as held income. The retention ratio alludes to the level of net gain that is held to develop the business, instead of being delivered out as profits. It is something contrary to the payout ratio, which gauges the level of benefit delivered out to investors as profits. The retention ratio is additionally called the plowback ratio.

Retained earnings (RE) is the measure of net gain left over for the business after it has delivered out profits to its investors. A business produces earnings that can be certain (benefits) or negative (misfortunes). Positive benefits give a great deal of space to the business owner(s) or the organization the executives to use the surplus cash earned. Regularly this benefit is paid out to investors, however it can likewise be re-put over into the organization for development purposes. The cash not paid to investors considers retained earnings.

Answer 2

The fraction of earnings that are retained by the company every year is zero.

What is retained earnings?

Retained earnings is the amount of a company's earnings that is not paid out to shareholders as dividends. It is usally net income less dvidiends. Dividends are payment made to sharholders out of net income.

Since the dividends is constant each year, the fraction of earnings are retained every year is 0.

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