What is the market price of a share of stock for a firm that pays dividends of $1.20 per share, has a P/E of 14, and pays its shareholders dividends equal to 40% of earnings?
A)$16.80
B)$42
C)$3
D)$28

Question

Quizplus · Accepted Answer

The dividend payout ratio is 40%, meaning 40% of earnings are paid as dividends. If $1.20 is 40% of earnings, then 100% of earnings (or earnings per share, EPS) is $3 ($1.20 / 0.4). With a P/E ratio of 14, the market price per share is EPS multiplied by the P/E ratio, which is $3 * 14 = $42.

What Is the Market Price of a Share of Stock