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TAT plc has ordinary shares with a par value of $0·50 in issue. The company generatedearnings per share of 45c for the financial year that has just ended. The dividend coverratio is 2·5 times and the gross dividend yield is 2% (Ignore taxation).What is the price/earnings ratio of the company?A. 2·8 timesB. 5·0 timesC. 20·0 timesD. 40·0 times

Question

TAT plc has ordinary shares with a par value of $0·50 in issue. The company generatedearnings per share of 45c for the financial year that has just ended. The dividend coverratio is 2·5 times and the gross dividend yield is 2% (Ignore taxation).What is the price/earnings ratio of the company?A. 2·8 timesB. 5·0 timesC. 20·0 timesD. 40·0 times

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Solution

To solve this problem, we need to first find the dividend per share, then the market price per share, and finally the price/earnings ratio.

  1. Find the Dividend per Share: The dividend cover ratio is the ratio of a company's net income to the dividend paid to shareholders. It's calculated as Earnings per Share / Dividend per Share. We can rearrange this formula to find the Dividend per Share: Dividend per Share = Earnings per Share / Dividend Cover Ratio. Substituting the given values, we get Dividend per Share = 45c / 2.5 = 18c.

  2. Find the Market Price per Share: The gross dividend yield is calculated as Dividend per Share / Market Price per Share. We can rearrange this formula to find the Market Price per Share: Market Price per Share = Dividend per Share / Gross Dividend Yield. Substituting the given values, we get Market Price per Share = 18c / 2% = $9.

  3. Find the Price/Earnings Ratio: The price/earnings ratio is calculated as Market Price per Share / Earnings per Share. Substituting the given values, we get Price/Earnings Ratio = $9 / 45c = 20 times.

So, the correct answer is C. 20·0 times.

This problem has been solved

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