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, 6%	$1,600,000
Preferred $5 stock, $100 par	206,000
Common stock, $9 par	166,860.00

Income before income tax was $230,400, and income taxes were $34,700 for the current year. Cash dividends paid on common stock during the current year totaled $45,423. The common stock was selling for $70 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	$
PART 2 Common stock, $40 par value (no change during the year) $7,600,000 Preferred $8 stock, $100 par (no change during the year) 2,000,000 The net income was $692,000 and the declared dividends on the common stock were $47,500 for the current year. The market price of the common stock is $23.80 per share. For the common stock, determine (a) the earnings per share, (b) the price-earnings ratio, (c) the dividends per share, and (d) the dividend yield. If required, round your answers to two decimal places. a. Earnings per Share $ b. Price-Earnings Ratio c. Dividends per Share $ d. Dividend Yield % e. Dividend yield		%

Answer 1

a.

time interest earned ratio = (income before income tax + interest expense ) / Interest expense  

= ( 230400 + 34700 ) / 34700 =13.1 %

b.

Earnings per share on common stock = ( net income - preference dividend ) / common shares

Net Income = Income before income tax - income tax
=230400-34700
=195700

preference dividend = 206000*0.05 = 10300

Earnings per share on common stock = (195700 -10300)/18540
=185400/18540
=10

c.Price earning ratio = market price of share / earning per share
=70/10
=7

d dividend per share = common dividend / common shares
=45423/18540
=2.45

e.dividend yield = dividend per share / market price per share
=2.45/70
=3.5

Part 2

a) Earnings per share on common stock = ( net income - preference dividend ) / common shares
Preference dividend = 200000*0.08 = 16000
no. of common shares = 7600000/40 = 190000

Earnings per share on common stock=(692000 - 160000) / 190000
=2.8

b..Price earning ratio = market price of share / earning per share

=23.80/2.8
=8.5

c dividend per share = common dividend paid / common shares
=47500/190000
=0.25

d.dividend yield = dividend per share / market price per share
=0.25/23.80
=1.05%