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, 7%	$1,800,000
Preferred $5 stock, $50 par	$222,000
Common stock, $9 par	$1,348,650.00

Income before income tax was $378,000, and income taxes were $56,100 for the current year. Cash dividends paid on common stock during the current year totaled $62,937. The common stock was selling for $14 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

• All working forms part of the answer
• [a]

A	Income before Income tax	$378,000
B = 1800000 bonds x 7%	Interest Expense	$126,000
C = A+B	Income before interest and tax	$504,000
D = C/B	Times interest earned	4.0	times = Answer

• [b]

A	Income before Income tax	$378,000
B	Income taxes	$56,100
C = A - B	Net Income	$321,900
D = (222000/50 par) share x 5	Preferred dividend	$22,200
E = C - D	Net Income for common stockholders	$299,700
F = 1348650 / 9 par	Common Stock no of shares	149850
G = E/F	Earnings per share	$2.00	Answer

• [c]

A	Market price per share	14.0
B	Earnings per share	2.0
C = A/B	Price earnings ratio	7.0	Answer

• [d]

A	Cash dividend	$62,937
B	Common Stock no of shares	149,850
C = A/B	Dividend per share of common stock	$0.42	Answer

• [e]

A	Dividend per share of common stock	$0.42
B	Market price per share	$14.00
C = A/B	Dividend yield	3.0%	Answer