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, 10%	$1,700,000
Preferred $5 stock, $50 par	340,000
Common stock, $14 par	3,808,000

Income before income tax was $680,000, and income taxes were $102,000, for the current year. Cash dividends paid on common stock during the current year totaled $97,920. The common stock was selling for $24 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 is computed as:

Times interest earned ratio=EBIT/interest expense

EBIT=Income before income tax+interest expense

Interest expense=10%*$1,700,000=$170,000

EBIT=$680,000+$170,000

EBIT=$850,000

Thus,

Times interest earned ratio=$850,000/$170,000

Times interest earned ratio=5 times

b. Earnings per share on common stock can be computed as:

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

Preferred stock dividend($340,000/50)*$5=$34,000

Net income=Income before income tax-income taxes

Net income=$680,000-$102,000=$578,000

Number of equity shares=3,808,000/$14=272,000 shares

Earnings per share on common stock=(578,000-34,000)/272,000

Earnings per share on common stock=544,000/272,000

Earnings per share on common stock=$2

c.Price earnings ratio can be computed as:

Price earnings ratio=Market price per share/Earnings per share

Price earnings ratio=$24/$2

Price earnings ratio=12

d.Dividends per share of common stock can be computed as:

Dividends per share of common stock =Total dividend on common stock/Number of shares

Dividends per share of common stock =$97,920/272,000

Dividends per share of common stock =$0.36 per share

e. Dividend yield is computed as:

Dividend yield(%)=(Dividend per share/Market price per share)*100

Dividend yield(%)=($0.36/$24)*100

Dividend yield(%)=1.5%