Question

David’s Magic Stores has an operating profit of $200,000. Interest expense for the year was $32,000; preferred dividends paid were $27,500; and common dividends paid were $42,000. The tax was $51,000. David’s Magic Stores has 22,000 shares of common stock outstanding.

a. Calculate the EPS and the common dividends per share for David’s Magic Stores. (Round the final answers to 2 decimal places.)

  

EPS	$
Common dividends per share	$

b. What is the payout ratio? (Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Payout ratio            %

  

c. What was the increase in retained earnings for the year?

Increase in retained earnings           $

  

d. If David’s share price is $70.00 what is its price-earnings ratio (P/E)? (Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Price earning ratio            times

Answer 1

a. EPS is computed as follows:

= (Operating profit - interest expense - tax - preferred dividend) / Number of shares outstanding

= ($ 200,000 - $ 32,000 - $ 51,000 - $ 27,500) / 22,000

= $ 89,500 / 22,000

= $ 4.068181818 or $ 4.07 Approximately

Common dividend per share is computed as follows:

= Common dividend / Number of shares outstanding

= $ 42,000 / 22,000

= $ 1.90909090 or $ 1.91 Approximately

b. Payout ratio is computed as follows:

= Dividend per share / Earnings per share

= $ 1.90909090 / $ 4.068181818

= 46.93% Approximately

c. Increase in retained earnings is computed as follows:

= Operating profit - interest expense - tax - preferred dividend - common dividend

= $ 200,000 - $ 32,000 - $ 51,000 - $ 27,500 - $ 42,000

= $ 47,500

d. P/E ratio is computed as follows:

= Price per share / Earnings per share

= $ 70.00 / $ 4.068181818

= 17.21 times Approximately