Question

Dungeoness Corporation has excess cash of $2,800 that it would like to distribute to shareholders as an extra dividend. Current earnings are $0.90 per share, and the stock currently sells for $40 per share. There are 210 shares outstanding. Ignore taxes and other imperfections.

If Dungeoness Corp. pays a cash dividend, what will be the dividend per share? After the dividend is paid, what will the price per share be? What are earnings per share (EPS) and the price earnings (P/E) ratio? Enter your answers rounded to 2 DECIMAL PLACES.

Dividend per share=  

Price per share =

Earnings per share (EPS) =

Price earnings (P/E) ratio=

Answer 1

SOLUTION:-

the information given in th equestion are as follows:-

shares outstanding = 210

current market price per share= $40

excess cash for extra divident= $2800

current earnings per share = $0.90

lets assume that,

• The whole current earnings of $.90 per share is paid as divident.
• The change in market price of share is exaclty that of divident paid.

Further calculations

a. extra divident per share

extra divident per share= excess cash for extra divident/ shares outstanding

extra divident per share= $2800/210

extra divident per share=$13.33

b. current earnings = current earnings per share * shares outstanding

= $0.90* 210

=$189

c. Total divident

Total divident= current divident + extra divident

=$189+$2800

= $2989

1).Divident per share

the equation for calculating divident per share is

here,

= $2989

= 210

= $2989 / 210

=$14.23

2).Price per share

In general, the stock price decrease with an amount equal to the amount of the dividend, but the actual price change is based on market activity and not determined by any governing entity. Stock market specialists will mark down the price of a stock on its ex-dividend date by the amount of the dividend.

new price per share = share price before declaration - divident per share

  new price per share = $40- $14.23

new price per share = $25.77

Note:-The day a dividend is approved by a corporation's board of directors, the amount of the dividend becomes a liability in accounting terms. At the end of the trading day, the stock price is adjusted to account for the dividend payout, and the new price is termed the ex-dividend price or new price per share. The ex-dividend price or new price per share is the closing stock price reduced by the price per share of the cash dividend.

3).Earnings per share (EPS)

Earnings per share is an important measure that investors use to determine whether to purchase a security. It is used as a basis for comparison in the price earnings and earnings yeild ratios.

The simple equation for EPS is  

here,

= $189

   = 210

= $0.9

Note:- Declaring and paying dividends has nothing directly to do with current earnings per share (EPS). A company whose EPS is lower than its dividend in a current year may be coming off of a string of more profitable years, with higher EPS, from which it has set aside cash to pay future dividends.

4).Price earnings ratio(PE)

The equation for calculating Price earnings ratio(PE) is

Here,

= 40

= $0.9

   = 44.44