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 directly calculate the dividend payout ratio. However, we can use a different formula:
Dividend payout ratio = Dividends per share / Earnings per share
Given:
Dividends on common stock = $4,500
Market price of common stock = $9.45 per share
We need to calculate the earnings per share to find the dividend payout ratio:
Earnings per share = Market price of common stock - Dividends per share
We do not know the dividends per share, but we can calculate it using the total dividends and the number of shares outstanding:
Dividends per share = Total dividends / Number of shares outstanding
Since the number of shares outstanding is not given, we cannot calculate the exact value of dividends per share. However, we can use an approximate number by assuming that the total dividends were paid on all outstanding shares. This would give us the maximum value for the dividend payout ratio:
Dividends per share = Total dividends / Number of outstanding shares
If we assume that the market price of the stock equals the book value per share (which is not given, but is a reasonable assumption for a mature company with stable earnings), we can estimate the number of outstanding shares as follows:
Book value per share = (Total common equity - Preferred stock) / Number of common shares outstanding
If we assume that there is no preferred stock and that the total common equity equals the market value of common stock (which is a reasonable assumption for a company with a stable dividend policy), we can estimate the number of outstanding common shares as follows:
Number of common shares outstanding = Market value of common stock / Book value per share
Market value of common stock = Market price per share * Number of common shares outstanding
Plugging in the given values, we get:
Number of common shares outstanding = ($9.45 per share) / (Total common equity / Number of common shares outstanding)
Total common equity = (Market value of common stock + Preferred stock) / Price-to-earnings ratio
Assuming that the price-to-earnings ratio equals the market price per share divided by the earnings per share, we can estimate the earnings per share as follows:
Price-to-earnings ratio = Market price per share / Earnings per share
Earnings per share = Market price per share / Price-to-earnings ratio
Plugging in the given values, we get:
Earnings per share = ($9.45 per share) / ($9.45 per share / Price-to-earnings ratio)
Simplifying, we get:
Earnings per share = Price-to-earnings ratio
Assuming a price-to-earnings ratio of 15 (which is a reasonable assumption for a mature company with stable earnings), we get:
Total common equity = ($9.45 per share * Number of common shares outstanding + Preferred stock) / 15
Number of common shares outstanding = ($9.45 per share) / (Total common equity / Number of common shares outstanding)
Plugging in the values, we get:
Number of common shares outstanding = ($9.45 per share) / (($9.45 per share * Number of common shares outstanding + Preferred stock) / 15 * $9.45 per share)
Simplifying, we get:
Number of common shares outstanding = 15 / (15 * Number of common shares outstanding + Preferred stock)
Assuming that there is no preferred stock, we can solve for the number of common shares outstanding:
15 * Number of common shares outstanding = 15
Number of common shares outstanding = 1
Using this value, we can estimate the dividends per share as follows:
Dividends per share = Total dividends / Number of shares outstanding
Dividends per share = $4,500 / 1 = $4,500
Finally, we can calculate the dividend payout ratio as follows:
Dividend payout ratio = Dividends per share / Earnings per share
Dividend payout ratio = $4,500 / $9.45 = 476.2%
This is a very high value, which suggests that either the company had very low earnings in Year 2 or that the assumption of paying all dividends on outstanding shares was too high. A more realistic value for the dividend payout ratio would be around 30-50%, which corresponds to earnings per share of $0.19-$0.32. This would give us a range of possible answers:
Dividend payout ratio = $4,500 / ($0.19 per share) = 23,684%
Dividend payout ratio = $4,500 / ($0.32 per share) = 14,063%
The closest answer is B) 13.4%.

Groeneweg Corporation Has Provided the Following Data: Dividends on Common