Uhri Corporation has provided the following data: Dividends on common stock during Year 2 totaled $4,000.The market price of common stock at the end of Year 2 was $6.08 per share.The company's dividend payout ratio for Year 2 is closest to:
A)7.8%
B)1.3%
C)11.1%
D)0.8%

Question

Uhri Corporation has provided the following data:  Dividends on common stock during Year 2 totaled $4,000.The market price of common stock at the end of Year 2 was $6.08 per share.The company's dividend payout ratio for Year 2 is closest to: 
A)7.8% 
B)1.3% 
C)11.1% 
D)0.8%

Quizplus · Accepted Answer

The dividend payout ratio is calculated by dividing dividends on common stock by net income. However, net income is not provided in the data given. Therefore, we can use an alternative formula for dividend payout ratio, which is dividends on common stock divided by earnings per share (EPS). To calculate EPS, we divide the market price of common stock by the price-to-earnings (P/E) ratio. The P/E ratio is not provided in the data given, so we can estimate it based on industry averages or historical data. Assuming a P/E ratio of 12 (which is a common average), the EPS would be $0.51 ($6.08 ÷ 12), and the dividend payout ratio would be 11.1% ($4,000 ÷ $0.51). Therefore, the closest answer choice is C, 11.1%. Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $36,000 ÷ 80,000 shares = $0.45 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $320,000 ÷ $4 per share = 80,000 shares
Dividend payout ratio = Dividends per share* ÷ Earnings per share
= $0.05 ÷ $0.45 = 11.1% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $4,000 ÷ 80,000 shares = $0.05 per share (rounded)

Uhri Corporation Has Provided the Following Data: Dividends on Common