How to Calculate a Dividend Payout Ratio in Finance Part 1 #Finance

have you been asked in perhaps a Finance class to calculate something such as this where you’re trying to figure out the dividend payout ratio where

you’re given a certain set of factors and you’re not quite sure how to do it well you’ve come to the right place because I’m Professor Capco and I’m going to show you in this series of CashNews.cos how to accomplish this particular problem and uh we’re going to

go through it step by step there are a lot of steps and there’s several formulas and I’m going to lay out each and every one of the formulas for you and show each of the steps to solve this problem and you’ll be able to master this by the end of this but first I want to say

something awesome is about to happen for you so be on the lookout for it and now back to the CashNews.co in this problem you’re told that a firm wants to grow 5% without requiring any additional Equity financing The Firm maintains a constant Debt

Equity ratio of 0.55 and a total asset turnover ratio of 1.30 and a net Profit margin of 9% you’re asked to find the dividend pay out ratio B well we’re going to have to go through several steps to solve this and to determine this we’re going to

have to look into something sustainable growth rate otherwise known as the sgr and we’re going to use that to calculate this dividend payout rate ratio we’re also going to be doing something that’s called Dupont analysis you may have heard of DuPont analysis in fact I’ve

done a CashNews.co a prior CashNews.co on Dupont analysis and I’ve linked it up here for your benefit if you want I can create a CashNews.co going into Dupont analysis deeper if you would like but for right now we’re going to go through how to do Dupont analysis to arrive at the

dividend payout ratio through this problem this is going to be broken up into multiple CashNews.cos so this is going to be part one this CashNews.co because just it it’s going to be a lengthy process and this way you can just jump to the CashNews.co of the portion that you’re having

difficulty with so that’s the purpose behind that and uh we’re going to dig into this a little bit more so we’re going to first talk about this concept of the sustain aable growth rate the sustainable growth rate is the maximum rate of growth a company can achieve without having

to raise additional Equity while keeping a stable Debt to Equity ratio so that’s what it is in concept and for our purposes we’re going to have a sustainable growth rate I’m going to write this down the sgr I’m going to give

you one of your first formulas sgr for our purposes for this is going to be equal to the Roe that’s the return on Equity times the retention ratio so we’ve got Roe that is the turn on Equity so we’re going to multiply our return on

Equity by the retention ratio and that’s going to give us that’s going to return our sustainable growth rate so that’s going to be a key formula for us in fact let’s go ahead and set that out as a key formula because we’re going to use this here in a

bit but first we got to find these other components to find the sgr we’re going to need the Roe formula and and the retention ratio Formula so we’re going to talk about how to arrive at that so the first Formula as I said is a sustainable growth rate the next one that we need to know

this one here the retention ratio so this is we’ll call this the first Formula the second formula is going to be the tension ratio and to get that to get the retention ratio I’m just going to write it out retention ratio is going to be equal to 1 minus the dividend payout ratio and note

that’s what we’re looking for here we’re trying to solve the dividend payout ratio so that’s why this is important to know that retention ratio to arrive at what the dividend payout ratio is so you’ve got the retention ratio and we got the sustainable growth rate these

are two important formulas that you’re going to be utilizing in this calculation let’s give you one more there’s still more to know but let’s go ahead and write down the next one because we’re going to be working with all of these and I hope you’re J jotting them

down the next one is the return on Equity return on Equity otherwise known as the Roe and we’re going to be doing this return on Equity we’re going to be doing it with the DuPont analysis so return on Equity will be

calculated using Dupont analysis and we’re going to dive into that a little bit further down the road but let’s go ahead and write down the formula because again we’re going to need these so let’s have them all here where we have them return on Equity with

it tupon analysis is going to be the net Profit margin times total asset turnover times Equity the Equity multip multiplier the Equity multiplier so we’ve got three important formulas here the sustainable growth rate and

that’s broken down into the return on Equity times the retention ratio the retention ratio we are told is the retention ratio is equal to one minus the dividend payout ratio and remember this is what we’re trying to solve for so we’re going to be working using

algebra to solve the dividend payout ratio because that’s what the problem’s asking for so when we get to that point we’re going to solve for that and you’ll see just how in case you’re a little rusty on that we also need to know the return on Equity

right because we have that is part of the sgr and the return on Equity there’s more than one way to calculate this but the one we’re doing is the DuPont analysis and the DuPont analysis sort of spreads it out it spreads it out for you and so our return on

Equity is equal to the net Profit margin times total asset turnover times the Equity multiplier all right so that’s quite a lot of formulas to know and we’re going to dive into this some more but I think that’s enough for the

first CashNews.co you’ve got some of the basic formulas that you’re going to be using and then we’re going to dive into it and actually start applying numbers to these formulas so we can arrive at the ultimate number here that we’re looking for the dividend payout ratio now

because that is a lot of work and this is something that is uh quite extensive and quite valuable uh we’re going to have this the remainder of these CashNews.cos will be for members only so become a member of this channel um by clicking the join button if you look next to the subscription

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