Question

Earnings per Share, Price-Earnings Ratio, Dividend Yield

The following information was taken from the financial statements of Tolbert Inc. for December 31 of the current fiscal year:

Common stock, $25 par value (no change during the year)	$5,000,000
Preferred $4 stock, $200 par (no change during the year)	6,000,000

The net income was $680,000 and the declared dividends on the common stock were $50,000 for the current year. The market price of the common stock is $23.80 per share.

For the common stock, determine (a) the earnings per share, (b) the price-earnings ratio, (c) the dividends per share, and (d) the dividend yield. If required, round your answers to two decimal places.

a. Earnings per share $ _____

b. Price-Earnings Ratio

c. Dividends per Share $ _____

d. Dividend Yield _____ %

Answer 1

a. Earnings per share $ _____

The profitability of a firm from the point of view of ordinary shareholders can be measured in terms of number of equity shares. This is known as Earnings per share. It is calculated as follows:

Earnings per share = Net income available for ordinary Shareholders / Number of ordinary shares

Net income available for ordinary Shareholders = Net Income - Preferred stock dividend

Net income= $680,000

Preferred stock = $6,000,000 / $200

= 30000 numbers.

Preferred stock dividend = $4 x 30000 = $120,000

Number of ordinary shares= $5,000,000/$25

= 200,000 numbers

Earnings per share = ($680,000 - $120,000) / 200,000

= $2.80

b. Price-Earnings Ratio

The price earnings ratio indicates the expectation of equity investors about the earnings of the firm. It relates earnings to market price and is generally taken as a summary measure of growth potential of an investment, risk characteristics, shareholders orientation, corporate image and degree of liquidity. It is calculated as

Price Earnings Ratio = Market Price of Common stock / Earnings per ordinary shares

While substituting,

$23.8 / $2.8

= $8.5

c. Dividends per Share $ _____

Earnings per share as stated above reflects the profitability of a firm per share; it does not reflect how much profit is paid as dividend and how much is retained by the business. Dividend per share ratio indicates the amount of profit distributed to ordinary shareholders per share. It is calculated as:

Dividend per share = dividend /number of ordinary shares

= $50,000 /200,000 = $0.25

d. Dividend Yield _____ %

This ratio indicates return on investment; this may be on average investment or closing investment. Dividend (%) indicates return on paid up value of shares. But yield (%) is the indicator of true return in which share capital is taken at its market value.

Dividend yield = ( Cash Dividend per share / Market Price per share) × 100

=( $0.25/$23.8 ) × 100 = 1.05%