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CS Executive · Corporate Accounting and Financial Management · Introduction to Financial Management

Sundaram Textiles Ltd. earned a net profit after tax of ₹80 lakh and has 10 lakh equity shares outstanding. It declares a dividend of ₹3 per share. What is its retention ratio?

The retention ratio is 62.5%. Earnings per share are ₹8 (₹80 lakh divided by 10 lakh shares), and the dividend of ₹3 gives a payout of 37.5%. Retention is the remaining portion of earnings, 100% minus 37.5%, which equals 62.5%.

  1. A37.5%
  2. B62.5%Correct
  3. C30%
  4. D70%

Explanation

EPS = 80 lakh / 10 lakh = ₹8. Dividend payout = 3/8 = 37.5%. Retention ratio = 100% - 37.5% = 62.5%. The 37.5% option is the payout ratio, which is the mistake of reporting payout instead of retention.

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