Analyse investor ratios
Calculate dividend yield, dividend cover and price/earnings ratio, interpret investor return and assess possible improvements.
Cambridge International AS & A Level Business 9609, 2026–2028 syllabus and 2029 syllabus, section 10.2.5. Ratio calculations use the formulae listed in the relevant Cambridge syllabus. Written practice is self-checked. Specialist review has not been completed for this lesson; these exercises do not award an official mark or establish exam readiness.
Before you begin
- Read the figures, dates and assumptions supplied in the question before calculating or interpreting an accounting result.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
How is dividend yield calculated?
What you will learn
- Explain the forms and importance of return to investors
- Calculate the three Cambridge investor ratios
- Interpret their signals and assess actions to improve return
Use the prescribed investment formulae
Dividend yield (%) = dividend per share ÷ market price per share × 100. Dividend cover = profit for the year ÷ annual dividend. Price/earnings ratio = market price per share ÷ earnings per share. Use consistent periods and units, and keep the P/E answer as a multiple.
Dividend yield compares annual cash dividend per share with the current market price. Dividend cover indicates how many times profit for the year covers the annual dividend. P/E compares the market price with earnings per share and reflects investor expectations as well as current earnings.
Investor return includes trade-offs
Investors may value dividends, prospects for capital growth, risk, liquidity and business strategy differently. A high yield can result from a high dividend or a falling share price; a high cover can reflect resilience but may also mean dividends are low relative to profit.
Possible actions include improving sustainable profit, reviewing dividends, investing for growth or communicating credible prospects. Increasing dividends may raise immediate income but reduce funds retained for investment; higher earnings can improve cover or P/E interpretation, but the market price also moves.
Pause and explain
Dividend per share is $0.30 and market price per share is $6.00. What is dividend yield?
Worked example
A share trades at $4.00; annual dividend per share is $0.20; earnings per share is $0.50. The company earned $600,000 and paid $200,000 in total dividends. Calculate yield, cover and P/E.
Show the worked solution
- Yield=0.20÷4.00×100=5%.
- Dividend cover=600,000÷200,000=3 times.
- P/E=4.00÷0.50=8 times.
Answer Dividend yield is 5%, dividend cover is 3 times, and the P/E ratio is 8 times.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Market price per share is $12, annual dividend per share $0.60, profit for the year $3.6m, annual dividend $1.2m, and earnings per share $1.50. Calculate yield, cover and P/E.
Give me a hint
Use per-share values for yield and P/E, and total profit/dividend for cover.
Compare my reasoning
- Yield=0.60÷12×100.
- Cover=3.6÷1.2.
- P/E=12÷1.50.
Dividend yield=5%; dividend cover=3 times; P/E=8 times.
Look for these in your work
- Yield uses market price per share
- Cover is profit for year over annual dividend
- P/E is a multiple
A company's dividend yield rises from 3% to 7% while its share price falls sharply and the dividend per share is unchanged. Explain why the higher yield may not mean investors are better off.
Give me a hint
A yield can rise through a lower price, which may reflect weaker expectations or higher risk.
Compare my reasoning
- The numerator is unchanged.
- A lower market price raises the calculated yield.
- Consider the capital loss, reason for price fall and dividend sustainability.
Yield rises because the unchanged dividend is divided by a lower share price. Existing investors may have suffered a capital loss, and the fall may reflect weaker prospects or higher risk. Check why price fell and whether the dividend is sustainable before describing investor returns as improved.
Look for these in your work
- Ratio mechanism is correct
- Capital return is considered
- Sustainability and risk are assessed
A board considers increasing its annual dividend but is also financing a growth project. Assess the possible effect on investors and the business.
Give me a hint
A larger dividend can improve current income while reducing retained funds and cover.
Compare my reasoning
- Current dividend income may rise.
- Profit retained for the project or resilience may fall; dividend cover may decline.
- Compare project returns, cash forecasts, investor preferences and future earning capacity.
A higher dividend may benefit income-focused shareholders and improve their current cash return. But it reduces retained funds, can lower dividend cover and may force more borrowing or constrain a positive-NPV project. The board should compare cash capacity, project returns, investor priorities and the sustainability of future payouts.
Look for these in your work
- Investor benefit is recognised
- Funding and ratio trade-offs are covered
- Recommendation depends on project and cash evidence
Common mistakes
- Using dividend per share divided by earnings per share for yield
- Reversing annual dividend and profit in cover
- Reporting P/E as a percentage
What can you explain now?
How is dividend yield calculated?
Compare with the explanation
Dividend per share divided by market price per share, times 100
This compares dividend income with the share's market price.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
What does each investor ratio compare, and why can a higher number still signal a problem?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.