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, 7%	$1,800,000
Preferred $10 stock, $50 par	$62,000
Common stock, $9 par	$267,840.00

Income before income tax was $189,000, and income taxes were $27,800 for the current year. Cash dividends paid on common stock during the current year totaled $49,104. The common stock was selling for $55 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

Times Interest Earned ratio = (Income before taxes + Interest Expense ) / Interest Expense

= ($189,000 + $126,000 ) / $126,000

= $315,000 / $126,000

=2.5

b. EPS per Share

EPS = (Net Income - preferred Dividend ) / no of shares outstanding

Net Income = Income before taxes - Income taxes ) = $189,000 - $27,800 = $216800

EPS = $216,800 /29760

EPS = 7.29

c.Price Earnings Ratio

Price Earnings ratio = Share price / Earnings per share

= $55 / 7.29

=7.54

d.Dividend per share of common stock

Dividend per share = Annual Dividend / No of Shares

=$49,104 / 29760

=1.65

e.Dividend Yield

Dividend per share = Annual Dividend per share / Share price

=1.65 / 55

=0.03 or 3%