104. Riverton Company had earnings per share last year of $4.00 and an average share price of $48.00. Riverton uses the declining balance method of amortizing its capital assets and has not reported...

104. Riverton Company had earnings per share last year of $4.00 and an average share price of $48.00. Riverton uses the declining balance method of amortizing its capital assets and has not reported any large unusual items in the past few years. They have also reported cash from operations that closely mirror the changes in their net earnings. Silver Ltd is a competitor of Riverton and is trying to determine why its share price seems to be low compared to Riverton's share price. Silver's earnings per share last year were $6.00 and the historical price earnings ratio is currently 8 times. Silver uses the straight-line method for amortizing its capital assets and regularly reports large losses when it sells capital assets. Last year they also reported some gains from selling off a piece of land and from the settlement of a lawsuit.



Required:


A) Calculate the price earnings ratio for Riverton Company.
B) What does Riverton's P/E ratio tell you about the market's expectations for its shares as compared to the market's expectation for Silver Ltd's shares? What does it tell you about the assessment of their respective risks?
C) What was the average price of Silver's shares?
D) Why do you think the two companies have different price earnings ratios?

105. Mark Tyndall is successful entrepreneur and operates his company, Tynder Inc, as a private corporation. He initially invested $50,000 for the common shares three years ago, and last year the company was able to borrow $100,000 from the bank. The loan is still outstanding. Tynder Inc has just had its first profitable year, earning a net income of $75,000. Mark has only been paying himself a minimal salary and was looking forward to receiving more income in the form of dividends now that the company was profitable, but his accountant has suggested that the dividend payout ratio be limited to 25%.



Required:


A) What is a dividend payout ratio? If Mark follows the accountant's suggestion how much would the dividend be?
B) Does a company need to report net earnings to pay dividends? Explain briefly.
C) Why doesn't a company pay out all of its earnings as dividends? What factors are specific to Tynder Inc's case?
D) Why might a company not maintain a constant dividend payout ratio?
E) Explain what factors Mark should consider when determining the value of dividends to pay out. How would your answer differ if Tynder Inc was a public company?