Valuation Ratios
You are analyzing the company's stock as an investment, calculating the following things:
- the price/earnings ratio,
- the dividend yield, and
- the dividend payout.
To calculate the valuation ratios for Lucky 7, Inc. for 2016, you will need the following information:
- The market price per share on December 31, 2016, was $24.60.
- The dividends per share for 2016 was $0.14.
Price/Earnings Ratio (P/E)
The P/E ratio is the ratio of the market price (current selling price) of a share of common stock to the company’s earnings per share (EPS). The P/E ratio measures the value that the stock market places on one dollar of a company’s earnings. P/E is calculated as follows:
- P/E = market price per share of common stock / EPS
- P/E = $24.60 / $2.00
- P/E = 12.30
Note: The market price per share is the closing price for the stock on December 31, 2016.
Dividend Yield
The dividend yield measures, as a percentage, the earnings that are returned to shareholders in the form of a dividend. The dividend yield is calculated as follows:
- dividend yield = annual dividends per share / market price per share
- dividend yield = $0.14 / $24.60
- dividend yield = 0.56%
Dividend Payout
The dividend payout is the ratio of dividends declared per common share relative to the company’s earnings per share (EPS). The dividend payout is calculated as follows: Note: This formula does not appear in the textbook.
- dividend payout = annual dividends per share / EPS
- dividend payout = $0.14 / $2.00
- dividend payout = 7.00%
