Question

Brief Exercise 226 The income statement for the Carolina Service Company for the year ended December 31, 2017, appears below. Sales revenue Cost of goods sold Gross profit Expenses Net income $670,000 390,000 280,000 180,000 $100,000 *Includes $25,000 of interest expense and $20,000 of income tax expense. Additional information: 1. Common stock outstanding on January 1, 2017, was 50,000 shares. On July 1, 2017, 10,000 more shares were issued. 2. The market price of Carolina's stock was $22 at the end of 2017. 3. Cash dividends of $35,000 were paid, $5,000 of which were paid to preferred stockholders. Compute the following ratios for 2017: (Round earnings per share to 2 decimal places, e.g. 2.25 and all other answers to 1 decimal place e.g. 15.5.) (a) Earnings per share (b) Price-earnings times (c) Times interest earned times Question Attempts: 0 of 1 used

Answer 1

a)	EPS = Net Income /Weighted Average Outstanding Common Shares
	= 100000/55000
	= 1.82
	This ratio signifies earning of investor for each single share held by him.
	Note 1: Weighted Average Outstanding common shares calculation
	Particulars	Shares Outstanding	Period Covered	Weighted Shares
	First Half of the year	50000	0.5	25000
	Second Half of the year	60000	0.5	30000
	Weighted Average			55000
b)	Price Earning Ratio = Market Price / Earning per shares
	=22/1.82
	12.1
	This ratio signifies no. of times a shares is pricing from the earning it is giving to its investor.
c)	Times Interest earned ratio = Income before interest and taxes or EBIT / Interest Expense
		= 145000/25000
		5.8
	Note 2: Income before interest and taxes
	Net Income	100000
	Add: Interest Expense	25000
	Add: Tax Expense	20000
	EBIT	145000
	This ratio signifies proportionate amount of income to cover interest expense.

Answer 2

Subtract the preferred dividends from a and you will get the correct answer for parts a and b