Multiple Choice
Dive Company maintains a policy to have a consistent payout ratio from year to year. Selected financial information for the company is as follows:
What amount of dividends would the company pay during the current year?
14. Financial Statement Analysis
Ratios: Payout Ratio
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ConsistoCo has a policy to maintain a constant payout ratio from year to year. During the previous fiscal year, net income totaled $1,200,000 and ConsistoCo paid $240,000 in dividends. This year, due to the settlement of a lawsuit, the company had net income of $700,000. What amount of dividends would investors expect ConsistoCo to declare this year?
A
$70,000
B
$140,000
C
$190,000
D
$240,000
Verified step by step guidance1
Determine the payout ratio from the previous fiscal year by dividing the dividends paid by the net income: Payout Ratio = \( \frac{\text{Dividends Paid}}{\text{Net Income}} = \frac{240,000}{1,200,000} \).
Calculate the payout ratio: \( \frac{240,000}{1,200,000} = 0.20 \) or 20%.
Apply the same payout ratio to this year's net income to find the expected dividends: Expected Dividends = Payout Ratio \( \times \) This Year's Net Income.
Substitute the known values into the formula: Expected Dividends = 0.20 \( \times \) 700,000.
Calculate the expected dividends using the formula to determine the amount investors would expect ConsistoCo to declare this year.
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