Question

The balance sheet for Seuss Company at the end of the current fiscal year indicated the following:

Bonds payable, 10% (20-year term)	$5,000,000
Preferred 10% stock, $100 par	1,000,000
Common stock, $10 par	2,000,000

Income before income tax was $1,500,000, and income taxes were $200,000 for the current year. Cash dividends paid on common stock during the current year totaled $150,000. The common stock sells for $75 per share at the end of the year.

Required:

Determine each of the following:

Round to one decimal place except earnings per share and dividends per share, which should be rounded to two decimal places.

1. Times interest earned		times
2. Earnings per share on common stock	$
3. Price-earnings ratio
4. Dividends per share of common stock	$
5. Dividend yield		%

Answer 1

Answer :

1. Times interest earned :

Times interest earned = Earning before interest & tax / Interest expense

Earning before interest & tax = Income before income tax + Interest expense

= $1,500,000 + ($5,000,000 x 10%)

= $1,500,000 + $500,000

= $2,000,000

Times interest earned = $2,000,000 / $500,000

= 4 times

2. Earnings per share on common stock :

Peferred stock = $1,000,000 x 10% = $100,000

Earnings per share on common stock

= (Income before income tax - Tax expense - Peferred stock) / Common outstanding shares

= ($1,500,000 - $200,000 - $100,000) / 200,000

= $6 per share

3. Price-earnings ratio :

Price-earnings ratio = MPS / EPS

Price earning ratio = $75 / $6 = 12.50 times

4. Dividends per share of common stock :

= $150,000 / 200000

= $0.75 per share

5. Dividend yield :

Dividend yield = Dividends per share of common stock / Market price per share x 100

= $0.75 / $75 x 100

= 1%