Question

A fundamental analyst is reviewing GEMCO's financial statements. The company has a current ratio of 4:1, a price-to-earnings (P/E) ratio of 12:1, $10 million in 5% debentures, and net income after preferred dividends of $4 million. If the current market price of GEMCO stock is $60 and the company pays dividends at a rate of $0.75 quarterly, the dividend payout ratio is

Answer 1

Answer: 60%

Explanation:

$0.75 quarterly dividends = $3/year

With a market price of $60 & a P/E ratio of 12:1, you divide 60/(12/1) and get 5, so the earnings per share must be $5.

That gives you dividends paid are $3 and earnings made are $5. Thats a 3:5 ratio and so that's 60%.