This is 50% multiplied by 1.15. This would be the dividend payout ratio if earnings had remained the same while the dividend increased by 15%. But earnings increased by 20%.
Probably the best way to solve this problem is to make an example. Let us assume that last year the earnings were $100 and that $50 was paid out. If the earnings increased by 20%, the earnings are now $120. If the payout increased by 15%, the payout is now $57.50. The new ratio is $57.50 ÷ $120, or 47.9%. This could also be calculated in the same manner using percentages. .50 × 1.15 = .575, the payout ratio if the dividend increased by 15% while the earnings remained the same. To calculate the payout ratio when earnings increased by 20%, divide .575 by 1.20. Also, given that the payout increased by less than the earnings, we know that the payout ratio had to decrease, and this is the only choice in which the answer decreased.
This answer results from multiplying 50% by 1.15 and then again by 1.35 (.35 is the total of .20 and .15). Instead, the product of the multiplication of 50% and 1.15 should be divided by 1 + the growth rate in earnings to calculate the new payout ratio. Please see the correct answer for a complete explanation.
This is the payout ratio for the past year. See the correct answer for a complete explanation.
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