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% $1,300,000 Preferred $10 stock, $50 par 75,000 Common stock, 58 par 435,000.00 Income before income tax was $273,000, and income taxes were $40,500 for the current year. Cash dividends paid on common stock during the current year totaled $32,625. The common stock was selling for $40 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.
Interest = Bonds Payable * % Interest = 1300000 * 6%	78000
Times interest earned ratio = ( Income before income tax + Interest ) / Interest = ( 273000 + 78000 ) / 78000	4.5	times

b.
Shares of common stock outstanding = Common stock / Par value per share = 435000 / 8	54375	shares
Shares of preferred stock outstanding = Preferred stock / Par value per share = 75000 / 50	1500	shares
Preferred dividend = Shares of preferred stock outstanding * Dividend per share = 1500 * 10	15000
Net income = Income before income tax - Income taxes = 273000 - 40500	232500
Earnings per share on common stock = ( Net income - Preferred dividend ) / Shares of common stock outstanding = ( 232500 - 15000 ) / 54375	4.00

c.
Price-earnings ratio = Market price per share of common stock / Earnings per share on common stock = 40 / 4.00	10.0
d.
Dividends per share of common stock = Dividends on Common stock / Shares of common stock outstanding = 32625 / 54375	0.60
e.
Dividend yield = Dividends per share of common stock / Market price per share of common stock = 0.60 / 40	1.5%