Question

Camp Company had total earnings of $600 million in 2013, out of which it retained 20 percent for future investments. In 2013, its stock featured a dividend yield of 4 percent and 100 million shares were outstanding. The price-earnings ratio for Camp Company stock was

Answer 1

Answer: $20

Explanation:

First, the earnings per share will be:

= $600 mill / 100 mill shares

= $6 per share

Since the retention ratio is 20%, it means that the payout ratio = 100% - 20% = 80%.

Therefore, the dividend per share will be:

=$6 × 80%

= $6 × 0.8

=$4.80

We will calculate then calculate market price as:

Dividend yield =Dividend per share / Market price

0.04 =$4.80 / Market price

Market price =$4.80 / 0.04

Market price = $120

The price earnings ratio will be:

= Market price / EPS

= $120 / $6

= $20