Question

Stock price = $40, dividend paid =$2, EPS = $4, so :

A. dividend payout ratio =5%

b dividend yield =5%

c. dividend yield =50%

d. P-E=20

e None of the above

Answer 1

Solution:

Stock price = $ 40, dividend paid =$ 2, EPS = $4, so : Dividend Yield = 5 %             

Thus the solution is Dividend Yield = 5 %

b.Dividend Yield = 5 %

The formula for calculating the Dividend Yield is

Dividend Yield = Dividend per share / Stock price

As per the information available we have

Dividend per share = $ 2   ; Stock Price = $ 40

Applying the information available in the formula we have Dividend Yield as

= $ 2 / $ 40

= 0.05

= 5 %

Thus the Dividend Yield is 5%

Thus Option b is correct.

The other options are incorrect due to the following :

A.Dividend Payout Ratio =5 %

The formula for calculating the Dividend Payout Ratio is

Dividend Payout ratio = Dividend per share / Earnings per share

As per the information available we have

Dividend per share = $ 2   ; Earnings per share = $ 4

Applying the information available in the formula we have Dividend Payout Ratio is

= $ 2 / $ 4

= 0.5

= 50 %

Thus the Dividend Payout Ratio is 50 % and not 5%

Thus Option A is incorrect.

C. Dividend yield =50%

As calculated in Point b above Dividend Yield = 5 %, thus Option c is incorrect.

d. P-E=20

The formula for calculating the P – E i.e., Price Earnings Ratio is

= Stock Price / Earnings per share

As per the information available we have

Stock Price = $ 40 ; Earnings per share = $ 4

Applying the information available in the formula we have P -E as

= $ 40 / $ 4

= 10

Thus the P – E is 10

Thus Option d is correct.

e.None of the above

Since Option b. is correct, this option is inapplicable.