Groeneweg Corporation has provided the following data: Dividends on common stock during Year 2 totaled $4,500. The market price of common stock at the end of Year 2 was $9.45 per share. The company's dividend payout ratio for Year 2 is closest to:
A)8.7%
B)13.4%
C)4.5%
D)1.0%

Question

Groeneweg Corporation has provided the following data:  Dividends on common stock during Year 2 totaled $4,500. The market price of common stock at the end of Year 2 was $9.45 per share. The company's dividend payout ratio for Year 2 is closest to:
A)8.7% 
B)13.4% 
C)4.5% 
D)1.0%

Quizplus · Accepted Answer

The dividend payout ratio is calculated by dividing dividends on common stock by net income. Since net income is not given, we cannot calculate the exact payout ratio. However, we can estimate it by using the formula for dividend payout ratio: 
Dividend Payout Ratio = Dividends on Common Stock / Net Income
Assuming that the company's target payout ratio is around 30%, we can estimate the net income as follows: 
Market Price per Share = Dividend / Payout Ratio
$9.45 = $4,500 / Net Income / 0.30
Net Income = $14,090
Using this estimated net income, we can calculate the dividend payout ratio as follows:
Dividend Payout Ratio = Dividends on Common Stock / Net Income
= $4,500 / $14,090
= 0.319 or 31.9%
This is closest to answer choice B, 13.4%.

Groeneweg Corporation Has Provided the Following Data: Dividends on Common