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NISM Certifications · NISM-Series-XV: Research Analyst · Terminology in Equity and Debt Markets

Case: Aarav Industries has a market price of ₹300 per share, EPS of ₹20 and a dividend per share of ₹6. Net profit is retained at the rate implied by these figures. Which statement is correct?

P/E is 15 (300/20), dividend yield is 2% (6/300), and since payout is 30% (6/20) the retention ratio is 70%. Options using 30% retention or a 6.7% yield confuse payout with retention or use the wrong base.

  1. AP/E is 15, dividend yield is 2%, and retention ratio is 70%Correct
  2. BP/E is 15, dividend yield is 2%, and retention ratio is 30%
  3. CP/E is 3.3, dividend yield is 30%, and retention ratio is 70%
  4. DP/E is 15, dividend yield is 6.7%, and retention ratio is 30%

Explanation

P/E = 300/20 = 15. Dividend yield = 6/300 = 2%. Payout = 6/20 = 30%, so retention = 70%. The 30% retention option confuses payout with retention; 6.7% wrongly uses EPS as the base.

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