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, $35 par value (no change during the year)	$7,000,000
Preferred $4 stock, $100 par (no change during the year)	3,000,000

The net income was $400,000 and the declared dividends on the common stock were $50,000 for the current year. The market price of the common stock is $9.80 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

Average number of common shares outstanding = Common stock, par value/Par value per common share
= 7,000,000/35
= 200,000
Preferred stock dividend = Number of preferred shares outstanding x Dividend per preferred share
= 30,000 x 4
= $120,000

a)
Earnings per share = (Net income – Preferred stock dividend)/Average number of common shares outstanding
= (400,000-120,000) /200,000
= 280,000/200,000
= $1.40

b)
Price earnings ratio = Market price of 1 common share/Earnings per share
= 9.80/1.40
= 7

c)
Dividend per share = Cash dividend declared on common stock/Average number of common shares outstanding
= 50,000/200,000
= $0.25

d)
Dividend yield = Dividend per share/Market price per share
= 0.25/9.80
= 2.55%

a. Earnings per Share	$	1.40
b. Price-Earnings Ratio		7
c. Dividends per Share	$	0.25
d. Dividend Yield	2.55	%

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