How is the amount of dividends paid out calculated?

Dividends paid out are typically calculated based on the company's net income and its retained earnings. The correct option indicates that dividends are determined by taking net income and subtracting the retained earnings. Retained earnings reflect the cumulative amount of income that has not been distributed to shareholders in the form of dividends. Essentially, the amount available for dividends corresponds to the profits that the company decides to distribute to its shareholders, which is influenced by net income and the need to retain sufficient earnings for future growth or operational needs.

This calculation is grounded in the understanding that a company can only pay dividends from profits generated during the period. If a company has high net income but decides to retain most of it for reinvestment, the actual dividends paid will reflect that decision, allowing the calculation of dividends to focus on how much of that net income is available for distribution after considering how much is retained in the business.