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    Finances - EPS, Dividend Yield, Payout Ratio

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    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.

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    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

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