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, 8%	$1,500,000
Preferred $5 stock, $50 par	$246,000
Common stock, $8 par	$106,272.00

Income before income tax was $420,000, and income taxes were $63,300 for the current year. Cash dividends paid on common stock during the current year totaled $99,630. 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

a

Particulars	Amount
Income before tax	$ 420,000.00
Add: interest expense	$ 120,000.00
EBIT	$ 540,000.00
Divided by interst expense	$ 120,000.00
Times interest earned	4.50

Answer is 4.50

b

Particulars	Amount
Income before tax	$ 420,000.00
Less:
Income taxes	$   (63,300.00)
Preferred dividend	$   (12,300.00)
Income to equity holders	$ 344,400.00
Divided by equity shares	13,284
EPS	$            25.93

Answer is $25.93

c

Particulars	Amount
Market price	$          250.00
/ EPS	$            25.93
PE ratio	9.64

Answer is 9.64

d

Particulars	Amount
Dividends	$    99,630.00
/ shares outstanding	$    13,284.00
Dividend per share	7.50

Answer is $7.50

e

Particulars	Amount
Dividend per share	$              7.50
/ share price	$          250.00
Dividend yield	3.00%

Answer is 3%

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