Question

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

Bonds payable, 6%	$1,100,000
Preferred $10 stock, $50 par	44,000
Common stock, $14 par	431,200.00

Income before income tax was $191,400, and income taxes were $28,600, for the current year. Cash dividends paid on common stock during the current year totaled $21,560. The common stock was selling for $35 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

a) Times Interest Earned Ratio = Income before interest and income tax/Interest Expense

Interest Expense on Bonds = $1,100,000*6% = $66,000

Income before interest and income tax = Income before income tax+Interest Expense

= $191,400+$66,000 = $257,400

Times Interest Earned Ratio = $257,400/$66,000 = 3.9 times

b) Earnings per share on Common Stock = Earnings Available for Common Stock/No. of Common Stock Shares

Earnings Available for Common Stock = Income before income tax - Income taxes - Preferred Dividends

= $191,400 - $28,600 - [($44,000/$50 par)*$10]

= $191,400 - $28,600 - $8,800 = $154,000

No. of Common Stock Shares = $431,200/$14 par = 30,800 shares

Earnings per share on Common Stock (EPS) = $154,000/30,800 shares = $5 per share

c) Price Earnings Ratio = Market Price per share/ Earnings per share on common stock

= $35/$5 = 7

d) Dividends per share of common stock = Total Dividends on Common Stock/No. of common stock shares

= $21,560/30,800 shares = $0.70 per share

e) Dividend Yield = Dividends per share/Market Price per share

= $0.70/$35 = 0.02 or 2%