Question

Patrick is the CFO of Reed Inc. Patrick says that RI earned $13 million last year and maintains a 30% dividend payout ratio. The company has 2 million shares of common stock outstanding and a P/E ratio of 10. What is the dividend yield for RI?
a. 1.50%
b. 2.50%
c. 3.00%
d. 4.50%

Answer 1

Answer:

     = 3%

Explanation:

Dividend yield is the proportion of a share a price that is earned as dividend. In other words, it is the dividend paid as a percentage of the share price.

Dividend yield = DPS/Share price  ×  100

The share price can be determined using the P/E ratio as follows:

Share price = P/E ×  EPS

Earnings per share (EPS) = $13 million/ 2 million

                                        = $6.5 per share

Share price = 10 × $6.5 = $65

Dividend paid (Dividend per share) = Payout ratio × EPS

                          = 30% × $6.5

                         = $1.95 per share

Dividend yield = DPS/Share price  ×  100

                        = 1.95/65  ×  100

                       = 3%