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, 9%	$1,700,000
Preferred $5 stock, $50 par	274,000
Common stock, $10 par	197,280.00

Income before income tax was $612,000, and income taxes were $91,400 for the current year. Cash dividends paid on common stock during the current year totaled $155,457. The common stock was selling for $225 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

Interest on debt = 9% * 1,700,000

Interest on debt = (9/100) * 1,700,000 = 153,000

Times interest earned = Earnings before interest and taxes (EBIT) / Interest

EBIT = Income before income tax + Interest

EBIT = 612,000 + 153,000 = 765,000

a. Times interest earned = 765,000 / 153,000 = 5.0x

b. Earnings per share on common stock = Net income / No. of common shares outstanding

Net income =  Income before income tax - income taxes

Net income =  612,000 - 91,400 = 520,600

Number of common shares outstanding = 197,280 / 10 = 19,728

Earnings per share on common stock = 520,600 / 19,728 = 26.39

c. Price-earnings ratio = Market price per share / Earning per share

Price-earnings ratio = 225 / 26.39 = 8.53

d. Dividends per share of common stock = Dividend paid / No. of common shares outstanding

Dividends per share of common stock = 155,457 / 19,728 = 7.88

e. Dividend Yield = Dividend per share / Market price per share

Dividend Yield = 7.88 / 225 = 0.0350 = 3.5%