Dividends are equal to:
a) Capital gains minus retained earnings.
b) Corporate profits.
c) Corporate profits + retained earnings.
d) Corporate profits – retained earnings.
The correct answer and explanation is:
The correct answer is d) Corporate profits – retained earnings.
Explanation:
Dividends are a portion of a company’s profits that are distributed to its shareholders. Companies often decide to distribute dividends from their accumulated profits, which are typically calculated after deducting all operational costs, taxes, and retained earnings.
- Corporate Profits: Corporate profits refer to the total earnings of the company after all expenses and taxes have been deducted. This amount represents the company’s net income for the period.
- Retained Earnings: Retained earnings are the portion of the company’s profits that are kept (not distributed) for reinvestment in the business or to pay down debt. These earnings are accumulated over time and are reflected in the company’s balance sheet.
- Dividend Distribution: The amount of dividends a company can pay is determined by the total corporate profits minus the amount it chooses to retain for future growth (retained earnings). If a company decides to retain a large portion of its profits for reinvestment or future expenses, the dividends paid to shareholders will be lower.
- For example, if a company earns $1 million in profits but decides to retain $700,000 for reinvestment, it can pay out $300,000 in dividends. This means the dividend distribution comes from the remaining profits after retained earnings have been set aside.
Dividends are typically paid in cash or additional shares and are a way for companies to reward their shareholders for investing. The balance between paying dividends and retaining earnings is crucial for a company’s long-term financial health and growth strategy.