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Finances - EPS, Dividend Yield, Payout Ratio

1. Assume the following financial data:

Short-term assets . . . . . . . . . . . . . . . . . . . . . $200,000
Long-term assets . . . . . . . . . . . . . . . . . . . . . . 350,000
Total assets . . . . . . . . . . . . . . . . . . . . . . . $550,000
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . $100,000
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . 50,000
Total liabilities . . . . . . . . . . . . . . . . . . . . . . 150,000
Common stock . . . . . . . . . . . . . . . . . . . . . . . 150,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . 250,000
Total liabilities and stockholders' equity . . . . $550,000
Total earnings (after-tax) . . . . . . . . . . . . . . . . $ 48,000
Dividends per share . . . . . . . . . . . . . . . . . . . . $ 1.10
Stock price . . . . . . . . . . . . . . . . . . . . . . . . $ 54
Shares outstanding . . . . . . . . . . . . . . . . . . . . . 16,000

a. Compute the P/E ratio (stock price to earnings per share).
b. Compute the ratio of stock price to book value per share (note that
book value equals stockholders' equity).
c. Compute the dividend yield.
d. Compute the payout ratio.

2. A two-year investment of $2,000 results in a return of $150 at the end of the first year
and a return of $150 at the end of the second year, in addition to the return of the
original investment. The internal rate of return on the investment is:

a. 6.4%
b. 7.5%
c. 15.0%
d. None of the above

3. Suresh Singh, CFA, is analyzing a convertible bond. The characteristics of the bond and
the underlying common stock are given in the following exhibit:

Convertible Bond Characteristics
Par value $1,000
Annual coupon rate (annual pay) 6.5%
Conversion ratio 22
Market price 105% of par value
Straight value 99% of par value

Underlying Stock Characteristics
Current market price $40 per share
Annual cash dividend $1.20 per share

Compute the bond's:
a. Conversion value.
b. Market conversion price.

Solution Preview

1.
a. Compute the P/E ratio (stock price to earnings per share).
Stcok Price = $54
EPS = Earnings after tax / shares outstanding = 48000/16000 = 3.00
P/E=54/3.00=18.00
b. Compute the ratio of stock price to book value per share (note that
book value equals stockholders' equity).
Stockholder's equity = common stock + retained earnings = 150000+250000=400000
Book ...

Solution Summary

The solution calculates EPS, dividend yield and payout ratio.

$2.19