Question

Company F will have earnings per share of $4 this year and expect that they will pay out $3 of these earnings to shareholders in the form of a dividend. Company F's return on new investments is 10% and their equity cost of capital is 7%. The value of Company F's stock is

Answer 1

Solution:

Company F will have earnings per share of $4 this year and expect that they will pay out $3 of these earnings to shareholders in the form of a dividend. Company F's return on new investments is 10% and their equity cost of capital is 7%. The value of Company F's stock is

EPS = $4

The dividend payout for the shareholders = $3

Company F's return on new investment is 10%

equity cost of capital = 7%

The value of company F's stock is 3

Any company's dividend payout ratio gives the investors an idea that how much money it returns to its shareholders compared to how much it keeps on hand to reinvest in the growth pay off debt (or) add to cash reserves This ratio is easily calculated using the figures found at the bottom of the income statement of the company. It differs from dividend yield which compares the dividend on the payment to the current stock price of the company

Calculating of the Dividend Payout Ratio

The dividend payout ratio is most commonly calculated on the total basis using with the following formula

Dividend Payout Ratio = DP / NI

whereas

DP = Dividends paid
NI = Net income

Another way of calculating the dividend payout ratio is on per share basis. In this case, the formula used for this is dividends per share divided by earnings per share.
Here EPS represents the net income minus preferred stock dividends which divided by average number of shares outstanding over the given period of time.
One other variation is that preferred by some of the analysts uses the diluted net income per share that additionally factors in options on the stock of the company.