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%	$1,200,000
Preferred $10 stock, $100 par	181,000
Common stock, $12 par	705,900.00

Income before income tax was $297,600, and income taxes were $44,200 for the current year. Cash dividends paid on common stock during the current year totaled $42,354. The common stock was selling for $48 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	$ Correct
e. Dividend yield		%

Answer 1

a. Times interest earned ratio

Interest Expenses = $96,000 [$12,00,000 x 8%]

Times interest earned ratio = (Earnings Before Income Tax + Interest Expenses) / Interest Expenses

= [$297,600 + $96,000] / $96,000

= $393,600 / $96,000

= 4.1 Times

b. Earnings per share on common stock

Preferred Dividend = $18,100 [($$181,000 / $100) x $10]

Net Income = $253,400 [$297,600 - $44,200]

Number of common shares outstanding = 58,825 Shares [$705,900 / $12 per share]

Earnings per share on common stock = (Net Income – Preferred Dividend) / Number of common shares outstanding

= [$253,400 - $18,100) / 58,825 Shares

= $235,300 / 58,825 Shares

= $4.0 per share

c. Price-earnings ratio

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

= $48.00 / $4.0 per share

= 12 Times

d. Dividends per share of common stock

Dividends per share of common stock = Common Dividend Paid / Number of common shares outstanding

= $42,354 / 58,825 Shares

= $0.72 per share

e. Dividend yield

Dividend yield = (Dividend per share / Market price per share) x 100

= ($0.72 / $48.00) x 100

= 1.50%