Patrick is the CFO of Reed Inc. Patrick says that RI earned $13 million last year and maintains a 30% dividend payout ratio. The company has 2 million shares of common stock outstanding and a P/E ratio of 10. What is the dividend yield for RI?

a. 1.50%

b. 2.50%

c. 3.00%

d. 4.50%

= 3%

Explanation:

Dividend yield is the proportion of a share a price that is earned as dividend. In other words, it is the dividend paid as a percentage of the share price.

Dividend yield = DPS/Share price * 100

The share price can be determined using the P/E ratio as follows:

Share price = P/E * EPS

Earnings per share (EPS) = $13 million / 2 million

= $6.5 per share

Share price = 10 * $6.5 = $65

Dividend paid (Dividend per share) = Payout ratio * EPS

= 30% * $6.5

= $1.95 per share

Dividend yield = DPS/Share price * 100

= 1.95/65 * 100

= 3%