Topic list Syllabus reference

Key term The Price/Earnings (P/E) ratio is the ratio of a company's current share price to the earnings per share.
A high P/E ratio indicates strong shareholder confidence in the company and its future, eg in profit growth, and a lower P/E ratio indicates lower confidence.
The P/E ratio of one company can be compared with the P/E ratios of:

• 
  Other companies in the same business sector
  
• 
  Other companies generally
  

It is often used in stock exchange reporting where prices are readily available.

4. 
   Dividend yield
   

	Dividend yield is the return a shareholder is currently expecting on the shares of a company.
Formula to learn	_. .. , ... Dividend on the share for the year Dividend yield = - хЮ0% Current market value of the share (ex div)

1. 
   The dividend per share is taken as the dividend for the previous year.
   
2. 
   Ex-div means that the share price does not include the right to the most recent dividend.
   

Shareholders look for both dividend yield and capital growth. Obviously, dividend yield is therefore an important aspect of a share’s performance.


Dividend yield
Question
In the year to 30 September 20X8, an advertising agency declares an interim ordinary dividend of 7.4c per share and a final ordinary dividend of 8.6c per share. Assuming an ex div share price of 315 cents, what is the dividend yield?

BPP
LEARNING MEDIA

Answer
The total dividend per share is (7.4 + 8.6) = 16 cents
— X 100 = 5.1%
315

4.