Question

Show calculations please

Charlatan Used Auto World, Inc. earned $78 million last year and paid out 30 percent of earnings in dividends.

a.   By how much did the company’s retained earnings increase?

b.   With 20 million shares outstanding and stock price of $52, what was the dividend yield? (Hint: First compute dividends per share.)

c.   Based on the information given, what is the firm’s ‘Retention Ratio’?

Answer 1

a)

Net income = 78,000,000

Dividends paid = 30% of 78,000,000 = 23,400,000

Increase in company's retained earnings = Net income - dividends paid

Increase in company's retained earnings = 78,000,000 - 23,400,000

Increase in company's retained earnings = 54,600,000

b)

First we compute dividens per share

Total dividends = 23,400,000

Total shares outstanding = 20,000,000

Dividens per share = Total dividends / total shares outstanding

Dividens per share = 23,400,000 / 20,000,000

Dividens per share = $1.17

Dividend yield = Dividend per share / stock price

Dividend yield = 1.17 / 52

Dividend yield = 0.0225 or 2.25%

c)

Retention ratio = ( net income - dividends paid ) / Net income

Retention ratio = ( 78,000,000 - 23,400,000 ) / 78,000,000

Retention ratio = 54,600,000 / 78,000,000

Retention ratio = 0.7