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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 $1,335,000. Dividends were declared and paid on the preferred shares during the year, and a quarterly dividend of $0.40 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 $23.65 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 $fill in the blank 1
b. Price/earnings ratio fill in the blank 2 to 1
c. Dividend payout ratio fill in the blank 3 %
d. Dividend yield ratio fill in the blank 4 %

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.

Solutions

Expert Solution

1 )

a)

Earning Per share = Earning available to equity shareholders / Number of equity shares outstanding
Calculation of earning avalaiable to equity shareholders
Net Income ( Before preference Dividend ) 1335000
Less : Preference dividend -400000
(5000000 *8%)
Earnings Available to equity shareholders 935000
Number Of shares 400000
Earning per share 2.34

Earning per share = $ 2.34 per share

b) Price earning ratio = Market price / Earning per share

Price earning ratio = 23.65 / 2.34

Price earning ratio = 10.11 Times

c) Dividend payout ratio = Dividend per share*100 / earning per share

Annual Dividend per share = dividend per quater * 4

Annual Dividend per share = 0.4 * 4 = 1.6 per share

Dividend payout ratio = 1.6 *100 / 2.34

Dividend payout ratio = 68.38%

d) Dividend yield ratio = Annual dividend per share*100 / market price per share

Dividend Yield ratio = 1.6 *100 / 23.65

Dividend yield ratio = 6.77 %

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

ekkarill92 answered 1 year ago
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