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EPS, P/E Ratio, and Dividend Ratios The Stockholders' Equity section of the balance sheet for Obregon,...

EPS, P/E Ratio, and Dividend Ratios

The Stockholders' Equity section of the balance sheet for Obregon, Inc. at the end of 2017 appears as follows:

8%, $100 par, cumulative preferred stock, 200,000 shares authorized, 50,000 shares issued and outstanding $5,000,000
Additional paid-in capital on preferred 2,500,000
Common stock, $5 par, 500,000 shares authorized, 400,000 shares issued and outstanding 2,000,000
Additional paid-in capital on common 18,000,000
Retained earnings 37,500,000
Total stockholders' equity $65,000,000

Net income for the year was $1,345,000. Dividends were declared and paid on the preferred shares during the year, and a quarterly dividend of $0.30 per share was declared and paid each quarter on the common shares. The closing market price for the common shares on December 31, 2017, was $21.15 per share.

Required:

1. Compute the following ratios for the common stock:

When required, round earnings per share and price/earnings ratio answers to two decimal places. For dividend payout and dividend yield ratios, round raw calculations to 4 decimal places, but enter each answer as a percentage to two decimal places; for example, .17856 rounds to .1786 and would be entered as 17.86, indicating 17.86%.

a. Earnings per share $?
b. Price/earnings ratio ? to 1
c. Dividend payout ratio ? %
d. Dividend yield ratio ? %

2. Before recommending the stock of Obregon to a client, as a financial adviser, you would like to know:

  1. future earnings growth.
  2. risk of the stock.
  3. general economic trends and how they affect the company.
  4. all of these.

d

Solutions

Expert Solution

Assumed that net income provided was before charging preffered stock dividend.

a. Earnings per share = earnings avaiable to equity share holders / no of equity shares

Calcualtion of earnings avaiable to equity share holders:

Netprofit before preferance dividend = 1,345,000

less: preferred dividend =   400,000

(5000000*8%=400000)

earning avaiable to equity share holders = 945,000

no of shares = 500,000

EPS = 945000/500000=$1.89 per share.

b.Price / earnings ratio or P/E ratio = Market price / EPS= $21.15/1.89= 11.19 times

c.Dividend pay out ratio = Dividend per share / Earning per share

Calcualtion of dividend per share

dividend per quarter = 0.30 per share

total dividend declared per share = 0.30*4= $1.2 per share

Dividend payout ratio = 1.2/1.89=0.6349=63.49%

d. Dividend yeild ratio = Annual dividend per share / market price per share = 1.2/21.15=0.0567 or 5.67%

2. option D - All of the above

Reason: As an investor we perform fundamental analysis of the stock to know its future earning capacity ,expected return on capital employed and where the price is overvalued or undervalued at current scenario to invest .

to perform fundamental analysis we require future earnings growth rate , risk of the stock general economic trends and how they affect on the stock which will provide better understanding on the potential earning capacity of the stock and its sustainability of the market share in future.Thus all the 3 options are required for performing fundamental analysis of the stock.

ekkarill92 answered 2 years ago
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