Question

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

Bonds payable, 10% (issued in 2006, due in 2026)	$1,700,000
Preferred $10 stock, $50 par	63,000
Common stock, $12 par	1,134,000

Income before income tax was $238,000, and income taxes were $36,400, for the current year. Cash dividends paid on common stock during the current year totaled $41,580. The common stock was selling for $22 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. Number of times bond interest charges are earned		times
b. Number of times preferred dividends are earned		times
c. Earnings per share on common stock	$
d. Price-earnings ratio
e. Dividends per share of common stock	$
f. Dividend yield		%

Answer 1

Solution a:

Total interest expense = $1,700,000 * 10% = $170,000

Income before interest and taxes (EBIT) = EBT + Interest = $238,000 + $170,000 = $408,000

Number of times bond interest charges are earned = EBIT / Interest = $408,000 / $170,000 = 2.4 times

Solution b:

Earning after taxes = $238,000 - $36,400 = $201,600

Preference dividend = $63,000 / $50 * $10 = $12,600

Number of times preferred dividends are earned = Earning after taxes / Preference dividend

= $201,600 / $12,600 = 16 times

Solution c:

Earning per share on common stock = Earning for common shareholders / Nos of outstanding shares

Earning for common shareholders = $201,600 - $12,600 = $189,000

Nos of outstanding common shares = $1,134,000 / $12 = 94500 shares

Earning per share = $189,000/94500 = $2 per share

Solution d:

Price-earnings ratio = MPS / EPS = $22/$2 = 11

Solution e:

Dividends per share of common stock = Common stock dividend / Nos of common shares

= $41,580 / 94500 = $0.44 per share

Solution f:

Dividend yield = Dividend per share / Market price per share

= $0.44 / $22 = 2%