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, 10% Preferred $5 stock, $50 par Common stock, $6 par Income before income tax was $390,000, and income taxes were $57,950 for the current year. Cash dividends paid on common stock during the current year totaled S55,647. The common stock was selling for $18 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 b. Earnings per share on common stock c. Price-earnings ratio d. Dividends per share of common stock e. Dividend yield $1,300,000 229,000 927,450.00 times

Answer 1

Answer a.

Interest Expense = Interest Rate * Bonds Payable
Interest Expense = 10% * $1,300,000
Interest Expense = $130,000

Earnings before Interest and Taxes = Income before Income Tax + Interest Expense
Earnings before Interest and Taxes = $390,000 + $130,000
Earnings before Interest and Taxes = $520,000

Times Interest Earned Ratio = Earnings before Interest and Taxes / Interest Expense
Times Interest Earned Ratio = $520,000 / $130,000
Times Interest Earned Ratio = 4.00 times

Answer b.

Number of Preferred Stock Outstanding = Preferred Stock / Par Value per Preferred Stock
Number of Preferred Stock Outstanding = $229,000 / $50
Number of Preferred Stock Outstanding = 4,580

Preferred Stock Dividend = Preferred Dividend per share * Number of Preferred Stock Outstanding
Preferred Stock Dividend = $5 * 4,580
Preferred Stock Dividend = $22,900

Net Income = Income before Income Tax - Income Taxes
Net Income = $390,000 - $57,950
Net Income = $332,050

Number of Common Stock Outstanding = Common Stock / Par Value per Common Stock
Number of Common Stock Outstanding = $927,450 / $6
Number of Common Stock Outstanding = 154,575

Earnings per share on Common Stock = (Net Income - Preferred Stock Dividend) / Number of Common Stock Outstanding
Earnings per share on Common Stock = ($332,050 - $22,900) / 154,575
Earnings per share on Common Stock = $2.00

Answer c.

Price-Earnings Ratio = Current Price per Common Stock / Earnings per share on Common Stock
Price-Earnings Ratio = $18.00 / $2.00
Price-Earnings Ratio = 6.00

Answer d.

Dividends per share of Common Stock = Common Stock Dividend / Number of Common Stock Outstanding
Dividends per share of Common Stock = $55,647 / 154,575
Dividends per share of Common Stock = $0.36

Answer e.

Dividend Yield = Dividends per share of Common Stock / Current Price per Common Stock
Dividend Yield = $0.36 / $18.00
Dividend Yield = 0.02 or 2.00%