Dividend policy is an integral part of the firm’s financing decision. It involves determining how much of the profit earned by the company after paying the taxes is to be distributed to the shareholders. The dividend payout ratio is calculated by dividing the total dividends paid by the net income.

The formula for dividend payout ratio (DPR) is:

The retention ratio, calculated by subtracting the dividend payout ratio from 1, can further explain the company’s investment strategies. 

The retention ratio is the proportion of earnings that are retained by the company for future investment opportunities. The formula for retention ratio is: