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%	$1,000,000
Preferred $5 stock, $100 par	232,000
Common stock, $15 par	234,900.00

Income before income tax was $198,000, and income taxes were $29,800, for the current year. Cash dividends paid on common stock during the current year totaled $37,584. The common stock was selling for $120 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 = Earning Before Interest and Tax/Interest Expense

Interest Expense = Interest on Bonds payable

= Bonds payable*6% = $1,000,000*6% =$60,000

Earning Before Interest and Tax = Income before tax+Interest Expense

= $198,000+$60,000 = $258,000

Times interest earned ratio = $258,000/$60,000 = 4.3 times

b)  Earnings per share on common stock = Earning available for Common Stock/No. of common stock shares

Earning available for Common Stock = Income before taxes - Income tax - Preferred dividends

Preferred Dividends = $232,000*($5/$100) = $11,600

Earning available for Common Stock = $198,000 - $29,800 - $11,600 = $156,600

No. of common stock shares = Common Stock/Par value per share

= $234,900/$15 = 15,660 shares

Earnings per share on common stock = $156,600/15,660 shares = $10 per share

c) Price Earnings Ratio = Market Price per share/Earning per share

= $120/$10 = 12 times

d) Dividends per share of common stock = Dividends for Common Stock/No. of common stock shares

= $37,584/15,660 = $2.4 per share

e) Dividend Yield % = (Dividends per share/Market Price per share)*100

= ($2.4/$120)*100 = 2%