How to calculate earnings per share

As mentioned, you need two financial statements to calculate earnings per share, or EPS. You'll
need the net income and preferred stock dividends (if any) from the income statement, as well
as the number of common shares outstanding, which can be found in the stockholders' equity
section of the balance sheet.
First, subtract the preferred dividends paid from the net income. This will tell you the total
earnings available to common shareholders.

Next, divide the earnings total you just calculated by the number of outstanding shares listed
on the balance sheet. This will give you the EPS.

What is Dividend Per Share (DPS)?

Dividend Per Share (DPS) is the total amount of dividend attributed to each
individual share outstanding of a company. Calculating the dividend per share allows
an investor to determine the amount of cash he or she will receive on a per share
basis. Dividends are usually a cash payment paid to the investors in a company,
although there are other types of payment that can be received (discussed below).

Formula for Dividend Per Share

The formula for calculating dividend per share has two variations:

Dividend Per Share = Total Dividends Paid / Shares Outstanding

or

Dividend Per Share = Earnings Per Share x Dividend Payout Ratio

What is the 'Dividend Yield'

A financial ratio that indicates how much a company pays out in dividends each year relative to
its share price. Dividend yield is represented as a percentage and can be calculated by dividing
the dollar value of dividends paid in a given year per share of stock held by the dollar value of
one share of stock. The formula for calculating dividend yield may be represented as follows:

Yields for a current year are often estimated using the previous year’s dividend yield or by
taking the latest quarterly yield, multiplying by 4 (adjusting for seasonality) and dividing by the
current share price.

What is 'Book Value Per Common Share'

Book value per common share is a formula used to calculate the per share value of a company
based on common shareholders' equity in the company. Should the company dissolve, the
book value per common share indicates the dollar value remaining for common shareholders
after all assets are liquidated and all debtors are paid.

BREAKING DOWN 'Book Value Per Common Share'

The book value per common share (formula below) is an accounting measure based on
historical transactions:

Price-To-Book Ratio - P/B Ratio

What is the 'Price-To-Book Ratio - P/B Ratio'
The price-to-book ratio (P/B Ratio) is a ratio used to compare a stock's market value to
its book value. It is calculated by dividing the current closing price of the stock by the
latest quarter's book value per share.

Also known as the "price-equity ratio".

Calculated as:
P/B Ratio = Market Price per Share / Book Value per Share

where Book Value per Share = (Total Assets - Total Liabilities) / Number of shares
outstanding

A lower P/B ratio could mean that the stock is undervalued. However, it could also mean
that something is fundamentally wrong with the company. As with most ratios, be
aware that this varies by industry.

This ratio also gives some idea of whether you're paying too much for what would be
left if the company went bankrupt immediately.

Price-Earnings Ratio - P/E Ratio

What is the 'Price-Earnings Ratio - P/E Ratio'
The price-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its
current share price relative to its per-share earnings. The price-earnings ratio is also
sometimes known as the price multiple or the earnings multiple.

The P/E ratio can be calculated as: Market Value per Share / Earnings per Share

BREAKING DOWN 'Price-Earnings Ratio - P/E Ratio'

In essence, the price-earnings ratio indicates the dollar amount an investor can expect
to invest in a company in order to receive one dollar of that company’s earnings. This is
why the P/E is sometimes referred to as the price multiple because it shows how much
investors are willing to pay per dollar of earnings. If a company were currently trading at
a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of
current earnings.

Market Price Formula:

Book Value Per Share X Price to Book Value Per Share
What is the Market to Book Ratio (Price to Book)?
The Market to Book ratio (also called the Price to Book ratio), is a financial valuation
metric used to evaluate a company’s current market value relative to its book value.
The market value is the current stock price of all outstanding shares (i.e. the price
that the market believes the company is worth). The book value is the amount that
would be left if the company liquidated all of its assets and repaid all of its liabilities.
The book value equals the net assets of the company and comes from the balance
sheet. In other words, the ratio is used to compare a business’s net assets that are
available in relation to the sales price of its stock.

The market to book ratio is typically used by investors to show the market’s
perception of a particular stock’s value. It is used to value insurance and financial
companies, real estate companies, and investment trusts. It does not work well for
companies with mostly intangible assets. This ratio is used to denote how much
equity investors are paying for each dollar in net assets.

The market-to-book ratio is calculated by dividing the current closing price of the
stock by the most current quarter’s book value per share.

Market to Book Ratio Formula

The Market to Book formula is:

Market Capitalization / Net Book Value

or

Share Price / Net Book Value per Share

Where, Net Book Value = Total Assets – Total Liabilities

Dividend payout ratio

Posted in: Financial statement analysis (explanations)
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Dividend payout ratio discloses what portion of the current earnings the company is paying to its
stockholders in the form of dividend and what portion the company is ploughing back in the
business for growth in future. It is computed by dividing the dividend per share by the earnings per
share (EPS) for a specific period.

Formula:
The formula of dividend payout ratio is given below:

The numerator in the above formula is the dividend per share paid to common stockholders only. It
does not include any dividend paid to preferred stockholders.

It can also be computed by dividing the total amount of dividend paid on common stock during a
particular period by the total earnings available to common stockholders for that period.

Retention Ratio

Alternative Formula

The alternate formula to the retention ratio is 1 minus the payout ratio.

The payout ratio is the amount of dividends the company pays out divided by
the net income. This formula can be rearranged to show that the retention
ratio plus payout ratio equals 1, or essentially 100%. That is to say that the
amount paid out in dividends plus the amount kept by the company comprises
all of net income.
The Future Value formula may also be shown as

The Present Value formula may sometimes be shown as

Gordon Growth Model
Share 73

WHAT IT IS:
The Gordon Growth Model, also known as the dividend discount model (DDM), is a
method for calculating the intrinsic value of a stock, exclusive of
current market conditions. The model equates this value to the present value of
a stock's future dividends.

The model is named in the 1960s after professor Myron J. Gordon, but Gordon was not
the only financial scholar to popularize the model. In the 1930s, Robert F. Weise and
John Burr Williams also produced significant work in this area.

There are two basic forms of the model: the stable model and the multistage growth
model.

Stable Model
Value of stock = D1/ (k - g)
where:
D1 = next year's expected annual dividend per share
k = the investor's discount rate or required rate of return, which can be estimated using
the Capital Asset Pricing Model or the Dividend Growth Model (see Cost of Equity)
g = the expected dividend growth rate (note that this is assumed to be constant)

Multistage Growth Model

When dividends are not expected to grow at a constant rate, the investor must evaluate
each year's dividends separately, incorporating each year's expected dividend growth
rate. However, the multistage growth model does assume that dividend growth
eventually becomes constant. See the example below.

HOW IT WORKS (EXAMPLE):

Stable Model
Let's assume XYZ Company intends to pay a $1 dividend per share next year and you
expect this to increase by 5% per year thereafter. Let's further assume your
required rate of return on XYZ Company stock is 10%. Currently, XYZ
Company stock is trading at $10 per share. Using the formula above, we can calculate
that the intrinsic value of one share of XYZ Company stock is:

$1.00/(.10-.05) = $20

According to the model, XYZ Company stock is worth $20 per share but is trading at
$10; the Gordon Growth Model suggests the stock is undervalued.
The stable model assumes that dividends grow at a constant rate. This is not always a
realistic assumption for growing (or declining) companies, which gives way to the
multistage growth model.

Multistage Growth Model

Let's assume that during the next few years XYZ Company's dividends will increase
rapidly and then grow at a stable rate. Next year's dividend is still expected to be $1 per
share, but dividends willincrease annually by 7%, then 10%, then 12%, and then
steadily increase by 5% after that. By using elements of the stable model, but analyzing
each year of unusual dividend growth separately, we can calculate the current fair
value of XYZ Company stock.

Here are the inputs:

D1 = $1.00
k = 10%
g1 (dividend growth rate, year 1) = 7%
g2 (dividend growth rate, year 2) = 10%
g3 (dividend growth rate, year 3) = 12%
gn (dividend growth rate thereafter) = 5%

Since we have estimated the dividend growth rate, we can calculate the actual
dividends for those years:
D1 = $1.00
D2 = $1.00 * 1.07 = $1.07
D3 = $1.07 * 1.10 = $1.18
D4 = $1.18 * 1.12 = $1.32

We then calculate the present value of each dividend during the unusual growth period:
$1.00 / (1.10) = $0.91
$1.07 / (1.10)2 = $0.88
$1.18 / (1.10)3 = $0.89
$1.32 / (1.10)4 = $0.90

Then, we value the dividends occurring in the stable growth period, starting by
calculating the fifth year's dividend:
D5 = $1.32*(1.05) = $1.39

We then apply the stable-growth Gordon Growth Model formula to these dividends to
determine their value in the fifth year:
$1.39 / (0.10-0.05) = $27.80

The present value of these stable growth period dividends are then calculated:
$27.80 / (1.10)5 = $17.26
Finally, we can add the present values of Company XYZ's future dividends to arrive at
the current intrinsic value of Company XYZ stock:
$0.91+$0.88+$0.89+$0.90+$17.26 = $20.84

The multistage growth model also indicates that Company XYZ stock is undervalued (a
$20.84 intrinsic value, compared with a $10 trading price).

Analysts frequently incorporate an assumed sale price and sale date into these
calculations if they know the stock is not going to be held indefinitely.
Also, coupon payments can be used in place of dividends when analyzing bonds.

WHY IT MATTERS:
The Gordon Growth Model allows investors to calculate the value of a share
of stock exclusive of current market conditions. This exclusion allows investors to make
apples-to-apples comparisons among companies in different industries, and for this
reason Gordon Growth Model is one of the most widely used equity analysis and
valuation tools. However, there is some sentiment that Gordon Growth Model’s
exclusion of nondividend factors tends to undervalue stocks in companies with
exceptional brand names, customer loyalty, unique intellectual property, or other
nondividend, value-enhancing characteristics.

Mathematically, two circumstances are required to make the Gordon Growth Model
effective. First, a company must distribute dividends (however, analysts frequently apply
the Gordon Growth Model to stocks that do not pay dividends by making assumptions
about what the dividend would be if the company did pay dividends). Second,
the dividend growth rate (g) cannot exceed the investor's required rate of return (k). If g
is greater than k, the result would be negative, and stocks cannot have negative values.

The Gordon Growth Model, especially the multistage growth model, often requires users
to make somewhat unrealistic and difficult estimates of dividend growth rates (g). It is
important to understand that the Gordon Growth Model is highly sensitive to changes in
g and k, and many analysts perform sensitivity analyses to evaluate how different
assumptions change the valuation. Under the Gordon Growth Model, a stock becomes
more valuable when its dividend increases, the investor's required rate of return
decreases, or the expected dividend growth rate increases. The Gordon Growth Model
also implies that a stock price grows at the same rate as dividends.

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