Question

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

Common stock, $40 par value (no change during the year)	$6,400,000
Preferred $10 stock, $200 par (no change during the year)	4,000,000

The net income was $616,000, and the declared dividends on the common stock were $166,400 for the current year. The market price of the common stock is $40 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.

Round to one decimal place except earnings per share and dividends per share, which should be rounded to the nearest cent.

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
= 6,400,000/40
= 160,000
Number of preferred shares outstanding = Preferred stock, par value/Par value per common share
= 4,000,000/200
= 20,000
Preferred stock dividend = Number of preferred shares outstanding x Dividend per preferred share
= 20,000 x 10
= $200,000

a)
Earnings per share = (Net income – Preferred stock dividend)/Average number of common shares outstanding
=(616,000-200,000)/160,000
= 416,000/160,000
= $2.60

b)
Price earnings ratio = Market price of 1 common share/Earnings per share
=40/2.6
= 15.39

c)
Dividend per share = Cash dividend declared on common stock/Average number of common shares outstanding
=166,400/160,000
= $1.04

d)
Dividend yield = Dividend per share/Market price per share
=1.04/40
= 2.6%

a. Earnings per share	$	2.60
b. Price-earnings ratio		15.4
c. Dividends per share	$	1.04
d. Dividend yield	2.6	%