Question

Five Measures of Solvency or Profitability

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

Bonds payable, 7%	$1,700,000
Preferred $5 stock, $50 par	87,000
Common stock, $11 par	394,762.5

Income before income tax was $178,500, and income taxes were $26,250, for the current year. Cash dividends paid on common stock during the current year totaled $43,065. The common stock was selling for $40 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

Ans.(a)	Times Interest Earned Ratio =			Earning before interest and Tax / Interest Expense
	=			$178,500 / $119,000
	=			1.5 times
Ans.(b)	Earning per share =		Earning available for stockholders / No. of shares outstanding
	=		($178,500 - $26,250) / 35,888
	=		$       4.24
	# No. of shares outstanding =			Total amount of stock / Issued value
	=			$ 394,762.5 / $11
	=			35,888	shares
Ans.(c)	Price Earning Ratio =		Market value price per share / Earning per share
	=		$ 40 / $1.20
	=		$    33.33
Ans.(d)	Dividend per share of common stock =				Dividend / No. of shares outstanding
	=				$43,065 / $35,888
	=				$       1.20
Ans.(e)	Dividend Yield =		Annual dividend per share / Stock price per share
	=		$ 1.20 / $40
	=		3%