Question

AD Corporation had net income of $300,000 and paid out $125,000 in cash dividends to stockholders. The firm's retention ratio is _____ %. (Round the percent to the nearest whole number.)

A) 58%
B) 42%
C) 75%
D) 58.3%

Answer 1

To find the retention ratio, subtract the dividends paid from the net income, divide by the net income, and multiply by 100 to get a percentage. For AD Corporation, the retention ratio is approximately 58% when rounded to the nearest whole number.

Step-by-step explanation:

The student is asking about the retention ratio, which is a financial metric used to calculate the percentage of net income that is retained by a company after it has paid dividends to shareholders.

The retention ratio can be found by dividing the retained earnings by the net income, and then multiplying by 100 to get a percentage.

In the AD Corporation's case, the calculation would be: (Net Income - Dividends Paid) / Net Income = Retention Ratio. So the retention ratio is: ($300,000 - $125,000) / $300,000 = $175,000 / $300,000 = 0.5833, or approximately 58% when rounded to the nearest whole number.