Question

Franklin Electric is presently generating earnings available to common shareholders of​ $7.25 per share. The​ firm's income tax rate is​ 40%. Franklin is paying a dividend to the preferred shareholders of​ $2.10 per share. The​ firm's dividend payout ratio on common stock is​ 20%. What is the amount per share that Franklin will pay in dividends to common​ shareholders?

Answer 1

$1.45

Step-by-step explanation:

First of all we need to know what is earnings available to common shareholders (EACS).

EACS is the part of earnings which is available to common shareholders after deducting preference dividend from net income after taxes.

We can understand the as follows

Net Profit after taxes $ xxxx

Less: Preference dividend (xxxx)

Earnings available to.common shareholders xxxx

From this amount is we divide number of common stocks / shares, we will get Earnings Per Share (EPS)

EPS = Earnings available to equity shareholders / number of common stock shares

Dividend Payout Ration to common stock (given) = 20%

It means the comapny is paying 20% of EPS to common stock holders and 80% of EPS is tthe retained earnings of the company

Hence dividend to common stockholder = Earnings available.to common shareholders × dividend payout ratio

= $7.25 × 20%

= $1.45

$1.45 is the dividend which company pay to common shareholders