What financial statement metric measures the percentage of net profit retained in the firm after all cash dividend distributions?
ADividend Payout Ratio
BRetention (Plowback) Ratio
CReturn on Retained Earnings
DGross Profit Margin
Explanation
• Retention Ratio (Plowback Ratio) formula: $text{Retention Ratio} = 1 – text{Dividend Payout Ratio}$ or $frac{text{Retained Earnings}}{text{Net Income}}$.
• Sustainable growth rate depends directly on plowback ratio: $g = text{ROE} times text{Retention Ratio}$.
• Higher retention ratios provide internal equity funding for corporate expansion projects.
Exam Relevance
- Topic: Corporate Finance
- Subtopic: Growth Metrics
No Comments