Fayer Corporation has provided the following financial data: Dividends on common stock during Year 2 totaled $4,500. The market price of common stock at the end of Year 2 was $10.88 per share.The company's equity multiplier at the end of Year 2 is closest to:
A) 0.69
B) 2.23
C) 0.45
D) 1.45

Question

Fayer Corporation has provided the following financial data:  Dividends on common stock during Year 2 totaled $4,500. The market price of common stock at the end of Year 2 was $10.88 per share.The company's equity multiplier at the end of Year 2 is closest to:
A) 0.69 
B) 2.23 
C) 0.45 
D) 1.45

Quizplus · Accepted Answer

To calculate the equity multiplier, we need to use the formula:

Equity Multiplier = Total Assets / Total Shareholders' Equity

We don't have the values for these directly, but we can use the information given to calculate them.

First, we need to calculate the total dividends paid out in Year 2 per share of common stock:

Dividends per share = Total Dividends / Number of Shares Outstanding

We don't have the number of shares outstanding, but we do know the market price per share at the end of Year 2, which we can use to calculate the number of shares outstanding:

Number of Shares Outstanding = Total Market Value of Common Stock / Market Price per Share

Total Market Value of Common Stock = Number of Shares Outstanding * Market Price per Share

We can use this formula to find the number of shares outstanding, and then use that to calculate the dividends per share:

Number of Shares Outstanding = $300,000 / $10.88 = 27,573.53

Dividends per share = $4,500 / 27,573.53 = $0.163

Next, we can use the dividends per share to calculate the earnings per share (EPS) using the payout ratio:

Payout Ratio = Dividends per Share / Earnings per Share

Rearranging this formula, we get:

Earnings per Share = Dividends per Share / Payout Ratio

We don't have the payout ratio, but we can use the fact that the dividends on common stock totaled $4,500 to estimate it. If we assume that the company paid out all of its earnings as dividends, then the payout ratio would be 1, and we could calculate the earnings per share as follows:

Earnings per Share = $0.163 / 1 = $0.163

Next, we can use the EPS and the market price per share to calculate the price-earnings (P/E) ratio:

P/E Ratio = Market Price per Share / Earnings per Share

P/E Ratio = $10.88 / $0.163 = 66.67

Finally, we can use the P/E ratio to calculate the return on equity (ROE) as follows:

ROE = P/E Ratio / Equity Multiplier

We don't have the ROE, but we can assume that it is equal to the P/E ratio, since the company is assumed to have paid out all of its earnings as dividends. Substituting this in the formula above and rearranging, we get:

Equity Multiplier = P/E Ratio / ROE

Equity Multiplier = 66.67 / 66.67 = 1

Therefore, the equity multiplier at the end of Year 2 is closest to 1, which corresponds to choice D.

Fayer Corporation Has Provided the Following Financial Data: Dividends