(1) number o shares at the beginning of year 5,000,000 , common stock dividend d

Question

(1) number o shares at the beginning of year 5,000,000 , common stock dividend declared on july 1st 20%, net after tax income $2,500,000, dividend paid on common stock for the year $1,100,000, preferred dividend for the year $300,000. find the EPS closer is ? and the answers are 0.4, 0.50,0.0, 0.24 (2) assume that the above company trades at $10, what it is dividend yeild? and the answers are 2.50%, 2.00%, 2.20%, 2.55%. (3) the price earning is expected to be higher when? and the answers are roe is higher, roe is lower, price to book ratio is lower, and dividend payout ratio is higher.

Explanation / Answer

1) Net after tax income = $2,500,000 Less : Preferred dividend= $300,000 Net income available to common stock holders= $2,200,000 Dividend paid on common stock = $1,100,000 Dividend paid on common stock = Dividend payout ratio= 50% EPS= Earnings available to equity dshare holders/ Number of equity shares = $2200000/5000000 0.44 EPS is close to 0.4 2) Dividend yield = Dividend per share/ Market price per share= 0.2/10= 2% Dividend per share= Earnings per share* Dividend pay out ratio = 0.4*50% = 0.2 3) Price earning ratio is given by = MPS/EPS MPS= market price per share EPS= Earnings per share Dividend pay out ratio doesn’t effect EPS correct answer is : ROE is lower reason: when ROE is lower, EPS will be lower, MPS/EPS ratio will be higher

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