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CMA Intermediate · Financial Management and Business Data Analytics · Introduction to Financial Management

Sundaram Textiles Ltd has 10,00,000 equity shares. Its profit after tax is ₹50,00,000 and the finance manager must choose between retaining all profits or paying a dividend. If the company pays a dividend of ₹2 per share, what is the retention ratio?

The retention ratio is 60%. EPS is ₹5 (₹50 lakh divided by 10 lakh shares), the dividend of ₹2 gives a 40% payout, and the balance 60% of earnings is retained in the business.

  1. A60%Correct
  2. B40%
  3. C50%
  4. D20%

Explanation

EPS = 50,00,000 / 10,00,000 = ₹5. Dividend per share is ₹2, so payout ratio = 2/5 = 40%. Retention ratio = 100% - 40% = 60%. The 40% option is the payout ratio, which is the key mistake of confusing payout with retention.

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