Compute the (a) price-earnings ratio and (b) dividend yield based on the provided data.
Understand the Problem
The question is asking to compute two financial metrics: the price-earnings ratio and the dividend yield based on the provided financial data of Franklin Company.
Answer
Price-Earnings Ratio: 10, Dividend Yield: 0.02 (or 2%)
Answer for screen readers
- Price-Earnings Ratio: 10
- Dividend Yield: 0.02 (or 2%)
Steps to Solve
- Calculate the Price-Earnings Ratio (P/E Ratio)
To find the Price-Earnings ratio, we need to use the formula:
$$ P/E , Ratio = \frac{\text{Market Price per Share}}{\text{Earnings per Share}} $$
From the problem, we have:
- Market price per share = $150
- Earnings per share = $15
Plugging in the values:
$$ P/E , Ratio = \frac{150}{15} $$
- Perform the Division for the P/E Ratio
Calculating the above division:
$$ P/E , Ratio = 10 $$
The Price-Earnings ratio is 10.
- Calculate the Dividend Yield
To find the Dividend Yield, we use the formula:
$$ Dividend , Yield = \frac{\text{Annual Cash Dividends per Share}}{\text{Market Price per Share}} $$
From the problem, we have:
- Annual cash dividends per share = $3
- Market price per share = $150
Plugging in the values:
$$ Dividend , Yield = \frac{3}{150} $$
- Perform the Division for Dividend Yield
Calculating the division for the Dividend Yield:
$$ Dividend , Yield = 0.02 $$
The Dividend Yield is 0.02, or 2%.
- Price-Earnings Ratio: 10
- Dividend Yield: 0.02 (or 2%)
More Information
The Price-Earnings ratio of 10 indicates that investors are willing to pay $10 for every $1 of earnings. A Dividend Yield of 2% means that investors receive 2% of the investment back as a dividend.
Tips
- Confusing earnings per share with net income. Always ensure you are using the right figure (earnings per share in this case).
- Not correctly performing the division, which could lead to inaccurate ratios. Double-check calculations to avoid errors.
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