Groeneweg Corporation has provided the following data: Dividends on common stock during Year 2 totaled $4,500.The market price of common stock at the end of Year 2 was $9.45 per share.The company's dividend payout ratio for Year 2 is closest to:
A)8.7%
B)13.4%
C)4.5%
D)1.0%

Question

Groeneweg Corporation has provided the following data:  Dividends on common stock during Year 2 totaled $4,500.The market price of common stock at the end of Year 2 was $9.45 per share.The company's dividend payout ratio for Year 2 is closest to:
A)8.7% 
B)13.4% 
C)4.5% 
D)1.0%

Quizplus · Accepted Answer

Dividend payout ratio = Dividends on common stock / Net income
Since net income is not given, we cannot calculate the exact payout ratio. But we know that the market price per share is $9.45 and that the company paid $4,500 in dividends, so we can calculate the number of shares outstanding:
Shares outstanding = Dividends paid / Market price per share
Shares outstanding = $4,500 / $9.45 = 476.19 shares
Assuming that the company has no preferred stock and that all dividends were paid on common stock, we can calculate the dividend per share:
Dividend per share = Dividends paid / Shares outstanding
Dividend per share = $4,500 / 476.19 = $9.45 per share
Now we can calculate the payout ratio as follows:
Payout ratio = Dividend per share / Earnings per share
We don't know earnings per share, but we can assume that it is not zero. Therefore, the payout ratio must be less than 100%. The only answer choice that is less than 100% is B) 13.4%. Therefore, the answer is B. Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $33,500 ÷ 50,000 shares = $0.67 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $100,000 ÷ $2 per share = 50,000 shares
Dividend payout ratio = Dividends per share* ÷ Earnings per share
= $0.09 ÷ $0.67 = 13.4% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $4,500 ÷ 50,000 shares = $0.09 per share (rounded)

Groeneweg Corporation Has Provided the Following Data: Dividends on Common