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How does payout of dividends affects retained earnings and whether this may affect financial leverage on...

How does payout of dividends affects retained earnings and whether this may affect financial leverage on the company's earnings per share?

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Answer #1

Retained earnings are part of the earnings retained after the dividend payout. So higher the dividend payout, lower the retention ratio and lower the retained earnings and vice versa.

Financial leverage is the ratio of Operating profit (EBIT) to Pre-tax profit(EBT),so higher the debt component higher this ratio and vice versa. Dividends are paid out of the Earnings Per Share (EPS) and has no effect on the EPS. So dividend payout has no effect on EPS of the firm.

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