Question

Five Measures of Solvency or Profitability

The balance sheet for Garcon Inc. at the end of the current fiscal year indicated the following:

Bonds payable, 8%	$900,000
Preferred $5 stock, $100 par	$100,000
Common stock, $5 par	$23,125.00

Income before income tax was $115,200, and income taxes were $17,700 for the current year. Cash dividends paid on common stock during the current year totaled $38,850. The common stock was selling for $240 per share at the end of the year.

Determine each of the following. Round answers to one decimal place, except for dollar amounts which should be rounded to the nearest whole cent. Use the rounded answers for subsequent requirements, if required.

a. Times interest earned ratio		times
b. Earnings per share on common stock	$
c. Price-earnings ratio
d. Dividends per share of common stock	$
e. Dividend yield

Answer 1

a. Times interest earned ratio

Times interest earned ratio = (Income before taxes + Interest expenses) / Interest expenses

= [$115,200 + ($900,000 x 8.00%)] / ($900,000 x 8.00%)

= [$115,200 + $72,000] / $72,000

= $187,200 / $72,000

= 2.6 Times

b. Earnings per share on common stock

Earnings per share on common stock = (Net Income – Preferred dividends) / Number of common shares

= [($115,200 - $17,700) – (1,000 Shares x $5.00)] / [$23,125 / $5.00]

= [$97,500 - $5,000] / 4,625 Shares

= $92,500 / 4,625 Shares

= $20.0 per share

c. Price-earnings ratio

Price-earnings ratio = Current market price / EPS

= $240.00 per share / $20.00 per share

= 12.0 Times

d. Dividends per share of common stock

Dividends per share of common stock = Common stock dividends / Number of common shares

= $38,850 / 4,625 Shares

= $8.4 per share

e. Dividend yield

Dividend yield = [Dividend per share / Market price per share] x 100

= [$8.4 / $240] x 100

= 3.5%