Question

A.

A stock is selling for $12.80 a share given a market return of 18.5 percent and a capital gains yield of 6.8 percent. What was the amount of the last annual dividend that was paid?

B.

A stock is selling for $50 a share. There are 215,000 shares outstanding and the net income of the firm is $567,000. What is the P/E ratio?

C.

Tell Me Why Co. is expected to maintain a constant 3.8 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 5.6 percent, what is the required return on the company’s stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

A) Total market return on stock = Capital gains yield + Dividend yield

or, 18.5% = 6.8% + Dividend yield

or, Dividend yield = 11.7%

Also, Dividend yield = Dividend / stock price

or, Dividend = Dividend yield x stock price = 11.7% x $12.80 = $1.4976 or $1.50

B) Earnings per share (EPS) = Net income / no. of shares = $567,000 / 215,000 shares = $2.63720930232

PE ratio = market price / EPS = $50 / $2.63720930232 = 18.9594 or 18.96

C) Required return = (Dividend / Stock price) + growth rate

or, Required return = Dividend yield + growth rate = 5.6% + 3.8% = 9.40%