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%	$1,400,000
Preferred $10 stock, $50 par	46,000
Common stock, $13 par	74,750.00

Income before income tax was $145,600, and income taxes were $21,400 for the current year. Cash dividends paid on common stock during the current year totaled $23,000. The common stock was selling for $160 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)

Interest expense = 1,400,000 x 8%

= $112,000

Time interest earned ratio = ( Income before income tax + Interest expense)/ Interest expense

= (145,600+112,000)/112,000

= 2.3 times

b.
Preferred stock dividend = Number of preferred shares outstanding x Dividend per preferred share
= 46,000/50 x 10
= $9,200

Net Income = Income before income tax - Income tax - Interest expense

= 145,600-21,400-112,000

= $12,200

Number of common share = 74,750/13

= 5,750

Earnings per share on common stock = (Net income – Preferred stock dividend)/Number of common shares

= (12,200 - 9,200)/5,750

= $0.52

c)
Price earnings ratio = Market price of 1 common share/Earnings per share
= 160/0.52
= 307.69

d)
Dividend per share of common stock = common stock dividend/Number of common share

= 23,000/5,750

= $4

e)
Dividend yield = Dividend per share of common stock Market price of common share
= 4/160
= 2.5%

a. Times interest earned ratio	2.3	times
b. Earnings per share on common stock	$	0.52
c. Price-earnings ratio		307.69
d. Dividends per share of common stock	$	4
e. Dividend yield	2.5	%