Investment ratios — practice questions

EPS = 5 000 000 ÷ 2 000 000 = **$2.50**$

Total dividend = 40% × 5 m = $2 m$ DPS = 2 000 000 ÷ 2 000 000 = **$1.00**$

Dividend yield = (1.00 ÷ 4.00) × 100 = 25%

Dividend cover = 2.50 ÷ 1.00 = 2.5 times

P/E = 4.00 ÷ 2.50 = 1.6

1. Calculations for Tech Innovate plc:

• EPS: $50,000,000 / 10,000,000 shares = $5.00
• DPS: $5,000,000 / 10,000,000 shares = $0.50
• Dividend Yield: ($0.50 /$150.00) x 100 = 0.33%
• Dividend Cover: $5.00 /$0.50 = 10 times
• P/E Ratio: $150.00 /$5.00 = 30

2. Calculations for Stable Utilities plc:

• EPS: $100,000,000 / 50,000,000 shares = $2.00
• DPS: $60,000,000 / 50,000,000 shares = $1.20
• Dividend Yield: ($1.20 /$40.00) x 100 = 3.0%
• Dividend Cover: $2.00 /$1.20 = 1.67 times
• P/E Ratio: $40.00 /$2.00 = 20

3. Advice for an Income-Seeking Investor: An investor seeking a steady income should choose Stable Utilities plc.

Justification:

• Dividend Yield: Stable Utilities offers a much higher dividend yield (3.0%) compared to Tech Innovate (0.33%). This provides a significantly better immediate income return on the investment.
• Dividend Cover: While Tech Innovate's cover is very high (10x), Stable Utilities' cover of 1.67x is still considered safe (above 1.5), indicating the dividend is sustainable from current profits.
• P/E Ratio: Tech Innovate's high P/E of 30 reflects market expectations of future growth, making it a 'growth stock' suitable for investors seeking capital gains. Stable Utilities' lower P/E of 20 suggests it is valued more for its current earnings and stable dividend payments, fitting the profile of an 'income stock'.