Cima F2 Exam Question No 28

Question No 28:

Dividend related ratios?

Growth potential and the ability to generate future wealth in the entity may depend on the amount of profits retained. This relationship may be measured using the profit retention ratio: (Profit after dividends / Profit before dividends )× 100. The higher the proportion of earnings retained, the higher the growth potential. Cash is retained in the entity for growth as opposed to being paid to shareholders.
Dividend yield will indicate the return on capital investment, relative to market price: ( Dividend per share/ Market price per share
) × 100. Dividend cover measures the ability of the entity to maintain the existing level of dividend and is used in conjunction with the dividend yield: Earnings per share / Dividends per share
The higher the dividend cover, the more likely it is that the dividend yield can be maintained.