Saturday, November 19, 2011

Calculations on the Series 7 Exam

Don't want to mislead anybody--the Series 7 exam really does not involve lots and lots of heads-down calculations. But, it does include a few. And, when it does, the questions sometimes hit as hard as this one:

ABC pays a dividend of $2 on its common stock. The p/e ratio is currently 17. Therefore, if the dividend payout is 50%, the common stock trades for
A.A price that can not be determined by these facts alone

EXPLANATION: even though panic might set in, you do, in fact, have enough numbers to solve the problem, so A is quickly eliminated. The key here is to define and make sense of "dividend payout of 50%." The dividend is paid out of profits or earnings per share; earnings per share is/are the "e" in the "p/e" ratio. If $2 is half of the Earnings Per Share, the EPS = $4. The "p" or "price" of the stock is 17 times bigger than 4. $68.

No comments:

Post a Comment