Final answer:
The firm will reinvest $600,000, which is the remaining 60% of its $1 million earnings after a 40% dividend payout ratio.
Step-by-step explanation:
The firm will plow back $600,000 into the firm. The payout ratio is the percentage of earnings a company pays to its shareholders in the form of dividends. In this case, a 40% payout ratio means 40% of the firm's earnings are paid out to shareholders as dividends. Conversely, the portion of earnings that is not paid out as dividends is retained by the company to reinvest in its business or to pay off debt, which is known as retained earnings or plow back ratio.
Here's a step-by-step explanation:
- Calculate the amount of dividends: $1 million earnings * 40% payout ratio = $400,000 in dividends.
- Determine the retained earnings (plow back): $1 million earnings - $400,000 dividends = $600,000 retained.
Thus, the amount reinvested or plowed back into the firm is the remaining 60%, which is $600,000.