Profitability Analysis and Analytical Issues Paper 5
Rinker Corporation had 40,000 shares of common stock outstanding on November 30, Year 1. On May 20, Year 2, a 10% stock dividend was declared and distributed. On June 1, Year 2, Rinker issued options to its existing stockholders giving them the immediate right to acquire one additional share of stock for each share of stock held. The option price of the additional share was $6 per share, and no options have been exercised as of year end The average price of Rinker’s common stock for the year was $20 per share. The price of the stock as of November 30, Year 2, the end of the fiscal year, was $30 per share, and the company’s net income for the fiscal year was $229,680.Rinker had no outstanding debt during the year, and its tax rate was 30%.
The basic earnings per share (rounded to the nearest cent) of Rinker common stock for the fiscal year ended November 30, Year 2, was
Answer (A) is correct. BEPS is net income available to common shareholders divided by the weighted average number of common shares outstanding during the year. The denominator will include the 40,000 shares already outstanding plus the 4,000-share stock dividend (stock dividends and stock splits are deemed to have occurred at the beginning of the earliest period presented). Thus, 44,000 shares are considered to have been outstanding throughout the year. The stock options have no effect on the weighted-average shares outstanding because they were not exercised in the current period. BEPS is $5.22 ($229,680 ÷ 44,000).
A drop in the market price of a firm’s common stock will immediately increase its
Answer (D) is correct. Dividend yield equals dividends per common share divided by the market price per
common share. Hence, a drop in the market price of the stock will increase this ratio, holding all else constant.
Watson Corporation computed the following items from its financial records for the year:
Price-earnings ratio 12
Payout ratio 0.6
Asset turnover ratio 0.9
The dividend yield on Watson’s common stock is
Answer (A) is correct. Dividend yield is computed by dividing the dividend per share by the market price per share. The payout ratio (.6) is computed by dividing dividends by net income per share (EPS). The P/E ratio (12) is computed by dividing the market price per share by net income per share. Thus, assuming that net income per share (EPS) is $X, the market price must be $12X and the dividends per share $.6X (.6 × $X net income per share). Consequently, the dividend yield is 5.0% ($.6X dividend ÷ $12X market price per share).
An increase in the market price of a company’s common stock will immediately affect its
Answer (A) is correct. The only common ratios that use market price as a part of the calculation are the price-earnings ratio and the dividend yield. The dividend yield is computed by dividing the annual dividend by the current market price. Thus, an increase in market price will decrease the dividend yield.
For the most recent fiscal period, Oakland, Inc., paid a regular quarterly dividend of $0.20 per share and had earnings of $3.20 per share. The market price of Oakland stock at the end of the period was $40.00 per share. Oakland’s dividend yield was
Answer (C) is correct. Dividend yield is the dividend per share divided by the market price Oakland’s was thus 2% [($0.20 × 4) ÷ $40].
The dividend yield ratio is calculated by which one of the following methods?
Answer (C) is correct. Dividend yield is the dividend per share divided by the market price per share.
Mayson Company reported net income of $350,000 for last year. The company had 100,000 shares of $10 par value common stock outstanding and 5,000 shares of common stock in treasury during the year. Mayson declared and paid $1 per share dividends on common stock. The market price per common share at the end of last year was $30.The company’s dividend yield for the year was
Answer (D) is correct. Dividend yield is the dividend per share divided by the market price. Mayson’s was thus 3.33% ($1 ÷ $30)
Douglas Company purchased 10,000 shares of its common stock at the beginning of the year for cash. This transaction will affect all of the following except the
Answer (C) is correct. A firm’s net profit margin is its net income divided by net sales Both figures are derived from the income statement and are thus unaffected by a purchase of treasury stock.
Mayson Ltd. reported net income of £3,500,000 for last year. The company had 100,000 shares of common stock outstanding with a par value of £1 and 5,000 shares of common stock in treasury during the year. Mayson declared and paid dividends of £1 per share on its common stock. The market price per common share at the end of last year was £30, while the book value per common share was £10. The company’s dividend yield for the year was
Answer (C) is correct. The dividend yield is equal to the dividends per share divided by the market price per share. Both of these figures are stated in the question stem. The dividend per share is given as £1, and the market price per common share is stated as £30 at the end of the last year. Therefore, the dividend yield is equal to 3.33% (£1 ÷ £30). (There is a lot of excess information in the problem that is not needed to solve for the solution. Do not let this distract you.)
A corporation has an earnings yield of 12% and a dividend yield of 3%. What is its dividend payout ratio?
Answer (D) is correct. The dividend payout ratio is found by taking the dividends and dividing it by the income (or earnings). Dividend yield is the dividends per share divided by the
market price, and earnings yield is earnings per share divided by the market price. So dividing dividend yield by earnings yield results in dividends divided by earnings. Therefore, the dividend payout ratio is 25% (3% ÷ 12%).