Retention rate also called the retention ratio is a rate or percentage of the earnings available to the ordinary shareholders that companies do not pay off in terms of dividends and retain as part of retained earnings. The retention ratio is calculated by simply deducting the dividend payout ratio from 1. The formula is as follows:
Retention rate = 1- Dividend payout ratio
Example of Retention Rate:
Master Company had total earnings after interest and taxes of $50,000. That year the company paid a total of $23,000 in dividends as the dividend payout ratio was 46% ($23,000 / $50,000). Thus the retention rate will be 54% (1-46%).
In 2008, Keenan Company paid dividends totaling $3,600
Rubenstein Bros. Clothing is expecting to pay an annual dividend per
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