Question

Stock in Tasty Greens Restaurants is selling at $80 per share with 1 million shares outstanding. Last year, Tasty Greens earned $4 million, of which it retained $2.4 million for future investments. The dividend yield on the stock is
A. 8 percent

B. 2 percent

C. 3 percent

D. 5 percent

Answer 1

Answer:

B. 2 percent

Explanation:

1. ANNUAL DIVIDEND:

The net dividend paid to shareholders can be calculated as follows;

Retained Earnings = Net Income - Net Dividend Paid to the Shareholders

We are given the following information;

Retained Earnings = $2.4 million = $2,400,000

Net Income = $4 million = $4,000,000

Hence, by putting the above values in the equation as;

$2,400,000 = $4,000,000 - Net Dividend Paid to the Shareholders

or

Net Dividend Paid to the Shareholders = $4,000,000 - $2,400,000

Net Dividend Paid to the Shareholders = $1,600,000

or

Annual Dividend = $ 1,600,000

2. CURRENT STOCK PRICE:

Current stock price can be calculated as follows;

Current Stock Price = Outstanding Shares x Current price for a single share

We are given the following information;

Outstanding Shares = 1 million = 1,000,000

Current price for a single share = $80

Hence, by putting the above values in the equation as;

Current Stock Price = 1,000,000 x $80

Current Stock Price = $80,000,000

3. DIVIDEND YIELD:

Dividend Yield can be calculated as follows;

Dividend Yield = $\frac{Annual Dividend}{Current Stock Price}$

Annual Dividend = $1,600,000

Current Stock Price = $80,000,000

Dividend Yield = $\frac{1,600,000}{80,000,000}$

Dividend Yield = 0.02

Dividend Yield = 2%

Hence option B is the correct answer.