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, 7% $1,200,000

Preferred $10 stock, $50 par 56,000

Common stock, $7 par 343,000.00

Income before income tax was $243,600, and income taxes were $36,400, for the current year. Cash dividends paid on common stock during the current year totaled $44,100. The common stock was selling for $36 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 1.2 times

b. Earnings per share on common stock $

c. Price-earnings ratio

d. Dividends per share of common stock $

e. Dividend yield %

Answer 1

Answer a

• Interest Expense on Bonds payable: 7% * $1,200,000 = $84,000
• EBIT = Income before income tax + Interest Expense = $243,600 + $84,000 = $327,600

Times interest earned ratio = EBIT / Interest Expense = $327,600 / $84,000 = 3.9 times

Answer b

• Preferred stock Dividend = [$56,000 / $50 ] * $10 = $11,200
• Net Income = Income before income tax - Income taxes = $243,600 - $36,400 = $207,200
• Number of Equity Shares = 343,000 / $7 = 49,000 shares

Earnings per share on common stock = [Net Income -  Preferred stock Dividend] / Number of Equity Shares

= [$207,200 - $11,200] / 49,000 shares = $4

Answer c

Price-earnings ratio = Market Price per share / Earnings per share = $36 / $4 = 9

Answer d

Dividends per share of common stock = Totaled Dividends on common stock / Number of Shares

= $44,100 / 49,000 shares = $0.90 per share

Answer e

Dividend yield % = (Dividends per share / Market price per share) * 100 = ($0.90 / $36) * 100 = 2.5%