A company has 2 million shares of common stock outstanding.Annual sales are $26 million.The net profit margin is 8% and the dividend payout ratio is 40%.Currently the stock trades at $17.68 per share.Given this information, the company has a P/E ratio of

Question

Quizplus · Accepted Answer

Step 1: Calculate the earnings per share (EPS)
Net profit margin = Net income / Sales
0.08 = Net income / $26 million
Net income = $2.08 million
Dividend payout ratio = Dividends paid / Net income
0.4 = Dividends paid / $2.08 million
Dividends paid = $832,000
Retained earnings = $1.248 million
EPS = (Net income - Dividends paid) / Number of shares outstanding
EPS = ($2.08 million - $832,000) / 2 million shares
EPS = $0.624 per share

Step 2: Calculate the P/E ratio
P/E ratio = Stock price / EPS
P/E ratio = $17.68 / $0.624
P/E ratio = 28.33
Note: The reciprocal of the P/E ratio is the earnings yield, which is 3.53%

Step 3: Calculate the dividend yield
Dividend yield = Dividends per share / Stock price
Dividend yield = ($832,000 / 2 million shares) / $17.68
Dividend yield = 0.0235 or 2.35%

Therefore, the answer is C) 17 and a dividend yield of 2.35%.

A Company Has 2 Million Shares of Common Stock Outstanding