Certified Management Accountant 2025 – 400 Free Practice Questions to Pass the Exam

The dividend payout ratio is a key financial metric that measures the proportion of a company's earnings that is distributed to shareholders in the form of dividends. It is calculated by dividing the dividends per share by the earnings per share. This ratio provides insight into how much profit a company is returning to its shareholders versus how much it is retaining for reinvestment back into the business.

Choosing to divide dividends per share by earnings per share effectively shows the percentage of earnings that is being paid out as dividends. For instance, if a company reports an earnings per share of $2.00 and pays a dividend of $1.00 per share, the dividend payout ratio would be 50%. This indicates that the company is returning half of its earnings to shareholders while retaining the other half for growth, debt repayment, or other investments.

In contrast, other options do not properly reflect how the dividend payout ratio is calculated or provide relevant information about dividends in relation to earnings. For example, dividing total dividends by outstanding shares would yield the dividends per share, not the payout ratio, while relating net earnings to dividends declared doesn’t provide a straightforward ratio relative to each share's earnings.