The dividend payout ratio is a financial metric that measures the proportion of earnings a company pays out to its shareholders in the form of dividends. It is calculated by taking the dividends per share and dividing it by the earnings per share. This ratio helps investors understand how much profit a company is returning to shareholders versus how much it is retaining for growth or other purposes.
When calculated correctly, this ratio provides insight into a company’s financial health and dividend policy. A higher payout ratio may indicate that a company is returning a significant portion of its earnings to shareholders, which could appeal to investors looking for income through dividends. Conversely, a lower payout ratio might suggest that the company is reinvesting more of its earnings back into the business, which may lead to growth opportunities.
The other options do not reflect the correct calculation for the dividend payout ratio. The first option involves the market price per share, which is not relevant to determining the payout based on earnings. The third option suggests multiplying dividends per share by earnings per share, which does not yield a meaningful ratio. The fourth option incorrectly suggests dividing earnings per share by dividends per share, which would provide the inverse of the desired metric.