Modern Furniture Company had finally arrived at the point where it had a sufficient excess cash flow of $4.8 million to consider paying a dividend. It had 3 million shares of stock outstanding and was considering paying a cash dividend of $1.60 per share. The firm's total earnings were $12 million, providing $4.00 in earnings per share. The stock traded in the market at $88.00 per share.
However, Al Rosen, the chief financial officer, was not sure that paying a cash dividend was the best route to go. He had recently read a number of articles in The Wall Street Journal about the advantages of stock repurchases and before he made a recommendation to the CEO and board of directors, he decided to do a number of calculations.
What is the firm's P/E ratio?
If the firm paid the cash dividend, what would be its dividend yield and dividend payout ratio per share?
