# Dividend Yield & P/E Ratio & Rights Offerings

1.Stock in Rich Corporation is currently selling for $25.00 per share. The firm's dividend yield is 10%.

A. If the firm distributes 40% of its earnings, what are its earnings?

B. What is the firm's P/E ratio?

2. The Gold Mining Corporation is seeking to raise $10,000,000 through a rights offering. The company presently has 1,000,000 shares of common stock outstanding at a current market price of $25.00 per share.

A. How many new shares must be sold via the rights offering if the subscription price of the new stock is $20 per share?

B. How many new shares could a stockholder owing 100 shares purchase?

C. What is the value of one right?

D. What will the approximate price of the stock ex-rights?

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#### Solution Preview

1.Stock in Rich Corporation is currently selling for $25.00 per share. The firm's dividend yield is 10%.

A. If the firm distributes 40% of its earnings, what are its earnings?

Dividend Yield = 10%

Price = $25.00

Dividend Paid = $25*10%=$2.50

EPS=DPS/(1-retention ratio)=2.50/40%=$6.25

B. What is the firm's P/E ratio?

P/E=25/6.25=4.00

2. The Gold Mining Corporation ...

#### Solution Summary

This solution shows step-by-step calculations to determine the dividend yield, P/E ratio, rights offerings, shares and approximate prices of stocks ex-rights.

Finance: compute EPS, ratios, stockholders' equity, effective interest rate, PV, FV

Problem 1: Botox Facial Care had earnings after taxes of $280,000 in 2006 with 200,000 shares of stock outstanding. The stock price was $30.80. In 2007, earnings after taxes increased to $320,000 with the same 200,000 shares outstanding. The stock price was $40.00.

Compute earnings per share and the P/E ratio for 2006. The P/E ratio equals the stock price divided by the earnings per share.

Compute earnings per share and the P/E ratio for 2007.

Problem 2: Assume the following data for Cable Corporation and Multi-Media, Inc.

Cable

Corporation

Multi-

Media, Inc.

Net Income

$ 30,000

$ 100,000

Sales

300,000

2,000,000

Total Assets

400,000

900,000

Total Debt

150,000

450,000

Stockholders Equity

250,000

450,000

Compute return on stockholders equity for both firms using ratio 3a. Which firm has the higher return?

Compute the following additional ratios for both firms

Net Income / Sales

Net Income / Total Assets

Sales / Total Assets

Debt / Total Assets

Problem 3: If you borrow $4,000 at $500 interest for one year, what is your effective interest rate for the following payment plans?

Annual payment

Semiannual payments

Quarterly payments

Monthly payments

Problem 4: The Western Sweepstakes has just informed you that you have won $1 million. The amount is to be paid out at a rate of $50,000 a year for the next 20 years. With a discount rate of 12 percent, what is the present value of your winnings?

Problem 5: Martha Reed has been depositing $1,500 in her savings account every December since 1998. Her account earns 6 percent compounded annually. How much will she have in December of 2007? (Assume that a deposit is made in 2007. Make sure to count the years carefully.)

For Problems 6 and 7 assume interest payments are on an annual basis.

Problem 6: Ron Rhodes called his broker to inquire about purchasing a bond for Golden Years Recreation Corporation. His broker quotes a price of $1,170. Ron is concerned that the bond might be overpriced based on the facts involved. The $1,000 par value bond pays 13 percent interest, and it has 18 years remaining until maturity. The current yield to maturity on similar bonds is 11 percent.

Do you think the bond is overpriced? Do the necessary calculations.

Problem 7: Wilson Oil Company issued bonds five years ago at $1,000 per bond. These bonds had a 25-year life when issued and the annual interest payment was then 8 percent. This return was in line with the required returns by bondholders at that point in time as described below:

Real rate of return

2%

Inflation premium

3

Risk premium

3

Total return

8%

Assume that 10 years later, due to bad publicity, the risk premium is now 6 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 15 years remaining until maturity. Compute the new price of the bond.

Problem 8: Compute Ke and Kn under the following circumstances:

D1 = $4.60, P0 = $60, g = 6%, F = 3.00

D1 = $0.25, P0 = $20, g = 9%, F = 1.50

Problem 9: Cox Media Corporation pays an 11 percent coupon rate on debentures that are due in 20 years. The current yield to maturity on bonds of similar risk is 8 percent. The bonds are currently callable at $1,060. The theoretical value of the bonds will be equal to the present value of the expected cash flow from the bonds.

Find the theoretical market value of the bonds using semiannual analysis.

Do you think the bonds will sell for the price you arrived at in part (a)? Why?

Problem 10: You buy a 7 percent, 30-year, $1,000 par value, floating rate bond in 2001. By the year 2007, rates on bonds of similar risk are up to 9 percent. What is your one best guess as to the value of the bond?

Problem 11: Midland Petroleum is holding a stockholders meeting next month. Ms. Ramsey is the president of the company and has the support of the existing board of directors. All 11 members of the board are up for reelection. Mr. Clark is a dissident stockholder. He controls proxies for 40,001 shares. Ms. Ramsey and her friends on the board control 60,001 shares. Other stockholders, whose loyalties are unknown, will be voting the remaining 19,998 shares. The company uses cumulative voting.

How many directors can Mr. Clark be sure of electing?

How many directors can Ms. Ramsey and her friends be sure of electing?

How many directors could Mr. Clark elect if he obtains all the proxies for the uncommitted votes? (Uneven values must be rounded down to the nearest whole number regardless of the amount.) Will he control the board?

Problem 12: Walker Machine Tools has 5 million shares of common stock outstanding. The current market price of common stock is $42 per share rights-on. The companys net income this year is $15 million. A rights offering has been announced in which 500,000 new shares will be sold at $36.50 per share. The subscription price plus 10 rights is needed to buy one of the new shares.

What are the earnings per share and price-earnings ratio before the new shares are sold via the rights offering?

Problem 13: The stock of North American Dandruff Company is selling at $80 per share. The firm pays a dividend of $2.50 per share.

What is the dividend yield?

If the firm has a payout rate of 50 percent, what is the firms P/E ratio?

Problem 14: Ms. Reeves is in a 35 percent marginal tax bracket. If she receives $2.40 in cash dividends, how much in taxes (per share) will she pay? (Recall the 15 percent rule.)

Problem 15: The bonds of Generic Labs, Inc., have a conversion premium of $75. Their conversion price is $25. The common stock price is $21.50. What is the price of the convertible bond?

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