The plowback ratio is:
A) equal to net income divided by the change in total equity.
B) the percentage of net income available to the firm to fund future growth.
C) equal to one minus the retention ratio.
D) the change in retained earnings divided by the dividends paid.
E) the dollar increase in net income divided by the dollar increase in sales.

Question

Quizplus · Accepted Answer

The plowback ratio, also known as the retention ratio, is the percentage of net income that is retained by the firm to fund future growth. It is calculated by subtracting dividends paid from net income and then dividing by net income. Therefore, option B is the correct answer. Option A is incorrect because it uses the change in total equity instead of net income. Option C is incorrect because it reverses the formula for the retention ratio. Option D is incorrect because it only considers the change in retained earnings and ignores dividends paid. Option E is incorrect because it divides the change in net income by the change in sales, which is not an accurate representation of the plowback ratio.

The Plowback Ratio Is