Question

Here is the income statement for Myers, Inc. Myers, Inc. Income Statement For the Year Ended December 31, 2020 Sales revenue $426,000 Cost of goods sold 190,000 Gross profit 236,000 Expenses (including $10,000 interest and $20,000 income taxes) 86,000 Net income $ 150,000 Additional information: 1. Common stock outstanding January 1, 2020, was 16,000 shares, and 24,000 shares were outstanding at December 31, 2020. 2. The market price of Myers stock was $15.84 in 2020. 3. Cash dividends of $24,000 were paid, $6,000 of which were to preferred stockholders. Compute the following measures for 2020. (Round Earnings per share to 2 decimal places, e.g. 1.65, and all other answers to 1 decimal place, e.g. 6.8 or 6.8%.) (a) Earnings per share $ (b) Price-earnings ratio times (c) Payout ratio % (d) Times interest earned times

Answer 1

Average shares outstanding = (Beginning shares outstanding + Ending shares outstanding) / 2
Average shares outstanding = (16,000 + 24,000) / 2
Average shares outstanding = 20,000

Answer a.

Earnings per share = (Net income - Preferred dividend) / Average shares outstanding
Earnings per share = ($150,000 - $6,000) / 20,000
Earnings per share = $7.20

Answer b.

Price-earnings ratio = Market price per share / Earnings per share
Price-earnings ratio = $15.84 / $7.20
Price-earnings ratio = 2.2 times

Answer c.

Payout ratio = (Total dividend - Preferred dividend) / Net income
Payout ratio = ($24,000 - $6,000) / $150,000
Payout ratio = 12.0%

Answer d.

Earnings before interest and taxes = Net income + Interest expense + Income taxes
Earnings before interest and taxes = $150,000 + $10,000 + $20,000
Earnings before interest and taxes = $180,000

Times interest earned = Earnings before interest and taxes / Interest expense
Times interest earned = $180,000 / $10,000
Times interest earned = 18.0 times