Page 697 - Accounting Principles (A Business Perspective)

17. Analysis and interpretation of financial statements

future earnings prospects of the company. These different estimates may cause one investor to sell stock at a
particular price and another investor to buy at that price.
Payout ratio on common stock Using dividend yield, investors can compute the payout ratio on common

stock. Assume that Synotech's dividends per share were USD 1.80 and earnings per share were USD 5.03. To
calculate payout ratio on common stock, divide the dividend per share of common stock by EPS. The payout
ratio of stock in 2010 is:
Dividend per shareof common stock
Payout ratioon commonstock=
EPS
USD1.80 =35.8per cent
USD5.03
A payout ratio of 35.8 per cent means that the company paid out 35.8 per cent of its earnings in the form of
dividends. Some investors are attracted by the stock of companies that pay out a large percentage of their earnings.

Other investors are attracted by the stock of companies that retain and reinvest a large percentage of their earnings.
The tax status of the investor has a great deal to do with this preference. Investors in high tax brackets often prefer
to have the company reinvest the earnings with the expectation that this reinvestment results in share price
appreciation.
Dividend yield on common stock The dividend paid per share of common stock is also of much interest to
common stockholders. When the current annual dividend per share of common stock is divided by the current
market price per share of common stock, the result is called the dividend yield on common stock. Synotech's

2010 December 31, common stock price was USD 110.70 per share. Its dividends per share were USD 1.80. The
company's dividend yield on common stock was:
Dividend pershareof common stock
Dividend yieldon of commonstock=
Current market price pershareof commonstock
USD1.80 =1.63percent
USD110.7
Dividend yield on preferred stock Preferred stockholders, as well as common stockholders, are interested
in dividend yields. The computation of the dividend yield on preferred stock is similar to the common stock
dividend yield computation. Assume that Synotech's dividend per share of preferred stock is USD 5.10 with a
current market price of USD 84.00 per share. We compute the dividend yield on preferred stock as follows:

Dividend pershareof preferredstock
Dividend yieldon preferred stock=
Current market price pershareof preferred stock
USD5.10 =6.07per cent
USD84.00
Through the use of dividend yield rates, we can compare different preferred stocks having different annual
dividends and different market prices.
Cash flow per share of common stock Investors calculate the cash flow per share of common stock
ratio as follows:
Netcash providedby operatingactivities
Cash flowper shareof commonstock=
Average number of shares of commonstock outstanding
Currently, FASB Statement No. 95 does not permit the use of this ratio for external reporting purposes.
However, some mortgage and investment banking firms do use this ratio to judge the company's ability to pay
dividends and pay liabilities. The cash flow per share of common stock ratio for Synotech is as follows:

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