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CA Intermediate · Financial Management and Strategic Management · Scope and Objectives of Financial Management

Mehta Textiles Ltd. has 10,00,000 equity shares outstanding. Its net profit after tax is ₹80,00,000 and it has paid a dividend of ₹3 per share. What is the earnings per share and the retention ratio?

EPS is ₹8 (₹80 lakh divided by 10 lakh shares). Dividend of ₹3 gives a payout ratio of 37.5%, so the retention ratio is the balance, 62.5%. Quoting 37.5% as retention confuses payout with retention.

  1. AEPS ₹8; retention ratio 62.5%Correct
  2. BEPS ₹8; retention ratio 37.5%
  3. CEPS ₹3; retention ratio 62.5%
  4. DEPS ₹8; retention ratio 27.5%

Explanation

EPS = 80,00,000 / 10,00,000 = ₹8. Payout ratio = 3/8 = 37.5%, so retention ratio = 100 - 37.5 = 62.5%. Option B wrongly gives the payout ratio as the retention ratio. Check: retained earnings per share = 8 - 3 = 5, and 5/8 = 62.5%.

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