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, 8%	$1,500,000
Preferred $10 stock, $50 par	106,000
Common stock, $6 par	63,600

Income before income tax was $336,000, and income taxes were $49,800, for the current year. Cash dividends paid on common stock during the current year totaled $79,500. The common stock was selling for $250 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

Answer to Part a.:
Times Interest Earned Ratio = Earning before Interest and Taxes / Interest Expense
Earning before Interest and Taxes = Income before Income Tax + Interest Expense
Interest Expense = $1,500,000 * 8% = $120,000
Earning before Interest and Taxes = $336,000 + $120,000
Earning before Interest and Taxes = $456,000

Times Interest Earned Ratio = 456,000 / 120,000
Times Interest Earned Ratio = 3.80 times

Answer to Part b.:
Earning per Share = (Net Income – Preferred Dividend) / Common Stock Outstanding
Preferred Dividend = $106,000 *10 / 50 = $21,200
Common Stock Outstanding = 63,600 / 6 = 10,600 Stocks
Net Income = $336,000 - $49,800 = $286,200

Earning per Share = (286,200 – 21,200) / 10,600
Earning per Share = 265,000 / 10,600
Earning per Share = $25

Answer to Part c.:
Price-Earnings Ratio = Price per Share / Earning per Share
Price-Earnings Ratio = 250 / 25
Price-Earnings Ratio = 10 times

Answer to Part d.:
Dividend Per Share of Common Stock = Dividend Paid / Common Stock Outstanding
Dividend Per Share of Common Stock = 79,500 / 10,600
Dividend Per Share of Common Stock = $7.50

Answer to Part e.:
Dividend Yield Ratio = Dividend per Share / Share Price per Share * 100
Dividend Yield Ratio = 7.50 / 250 * 100
Dividend Yield Ratio = 3%