Question

AP11-18B (P/E, dividend payout, dividend yield and ROE) OCloud Corporation's suite of software products and services provides secure and scalable solutions for global companies. The following is an extract from the company's 2020 and 2019 comparative income statements and statement of financial position. The market price of OCloud's common shares was $40.93 and $38.20 on June 30, 2020, and June 30, 2019, respectively. OCloud declared dividends per common share of $0.477 and $0.415 for 2020 and 2019, respectively OCLOUD CORPORATION Years Ended June 30, 2020, and 2019 (in thousands) Comparative Income Statement Total revenues Total cost of revenues Total operating expenses Net income Statement of Financial Positionn Total assets Total liabilities Common share capital Total shareholders' equity Weighted average number of commons shares outstanding 2020 2019 $1,824,228 574,000 881,665 S 284,477 $2,291,057 762,391 1,175,734 $1,025,659 2020 $7.480.562 3,947.243 1,439.850 $3,533,319 2019 $5,154.144 3.774.947 817,788 $1,978,656 242,926 253,879 Required a. Calculate the return on shareholders' equity for OCloud in 2020. Note that OCloud's articles of incorporation authorize only common shares. The average return for the shares listed on the Toronto Stock Exchange in a comparable period was 19.8%. What information does your calculation provide an investor? b. Calculate earnings per share and the price/earnings ratio for the years 2020 and 2019. What does your calculation indicate about OCloud's earnings? c. Calculate the dividend payout ratio and the dividend yield for 2020 and 2019. What do the results ratico of these ratios tell us about OCloud?

Answer 1

a. Return on Shareholder`s Equity:

Return on SHareholders Equity = Net Income /Shareholders Equity

= $ 1,025,659/ $ 3,533,319

= $ 0.29 or 29%

As compared to the average return for the shares on the Toronto Stock Exchange, the Return on Shareholder`s Equity of OCloud`s articles 29% was more. So, it will be suggestable to invest in OCloud`s articles.

b. Earnings per Share and Price/Earnings Ratio:

Particulars	2020	2019
Earnings per Share= Net Income/Shares	4.04	1.17
Price/Earnings Ratio = Share price/Earnings per Share	10.13	32.64

As the net Income has been increased from 2019 to 2020, the Earnings per Share has also been increased.

The P/E Raio during the year 2019 was higher indicating that the investor was expecting the higher returns. It also indiates that the Company`s Common stock was being overvalued.

c.Dividend Payout Ratio:

Particulars	2020	2019
Dividend Payout Ratio=Dividend/Net Income	0.118	0.354
Dividend Yield Ratio= Annnual Dividend/Share Price	0.011	0.10

The dividend Payout Ratio has been decreased in the current year indicating that the Dividend paid to shareholders was less which inturn indicates that the retained earnings have been increased during the year.

Dividend yield ratio indicates the percentage of the Market price of a Share thats was paid to the shareholder annualy. In this case, the dividend yield has been reduced as compared to the previous year.