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, 6%	$1,900,000
Preferred $5 stock, $50 par	143,000
Common stock, $10 par	1,144,000.00

Income before income tax was $285,000, and income taxes were $41,900 for the current year. Cash dividends paid on common stock during the current year totaled $41,184. The common stock was selling for $18 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

Part - a:

Computation the times interest earned ratio is:

Times interest earned ratio = Earnings before payment of interest and taxes / Value of interest

= $399,000 / $114,000

= 3.5 times

Hence, the times interest earned ratio is 3.5 times.

Working note:

1.

Computation the value of interest is:

Value of interest = Value of bonds payable * Percentage of interest

= $1,900,000 * 0.06

= $114,000

Hence, the value of interest is $114,000.

2.

Computation the earnings before payment of interest and taxes is:

Earnings before payment of interest and taxes = Income before payment of taxes + Value of interest

= $285,000 + $114,000

= $399,000

Hence, the earnings before payment of interest and taxes is $399,000.

Part - b:

Computation the earnings per share on common stock is:

Earnings per share on common stock = (Net income - Value of preferred dividend) / Number of average shares

= ($285,000 - $14,300) / 114,400

= $270,700 / 114,400

= $2.37

Hence, the earnings per share on common stock is $2.37

Working notes:

1.

Computation of net income is:

Net income = Earnings before payment of taxes - Value of taxes

= $285,000 - $41,900

= $243,100

Hence, the net income is $243,100.

2.

Computation the value of preferred dividend is:

Value of preferred dividend = (Value of preferred stock / Par value of stock) * $5

= ($143,000 / $50) * $5

= 2,860 * $5

= $14,300

Hence, the value of preferred dividend is $14,300.

3.

Computation the number of average shares is:

Number of average shares = Value of common stock / Par value of stock

= $1,144,000 / $10

= 114,400

Hence, the number of average shares is 114,400.

Part - c:

Computation of price earnings ratio is:

Price earnings ratio = Market price of common stock at the end / Earnings per share of common stock

= $18 / $2.37

= 7.6 times

Hence, the price earnings ratio is 7.6 times.

Part - d:

Computation the dividend per share of common stock is:

Dividend per share of common stock = Value of cash dividend paid on common stock / Number of average shares

= $41,184 / 114,400

= $0.36

Hence, the dividend per share of common stock is 0.36

Working note:

Computation the number of average shares is:

Number of average shares = Value of common stock / Par value of stock

= $1,144,000 / $10

= 114,400

Hence, the number of average shares is 114,400.

Part - e:

Computation of dividend yield is:

Dividend yield = (Value of dividend per share on common stock / Market price of common stock at the end) * 100

= ($0.36 / $18) * 100

= 0.02 * 100

= 2%

Hence, the dividend yield is 2%.