Question

The balance sheet for Garcon Inc. at the end of the current fiscal year indicated the following:

Bonds payable, 8%	$900,000
Preferred $5 stock, $100 par	$238,000
Common stock, $8 par	$57,120.00

Income before income tax was $223,200, and income taxes were $32,800 for the current year. Cash dividends paid on common stock during the current year totaled $74,970. The common stock was selling for $300 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 expense = (900,000*8%) = 72,000 Times interest earned ratio = Income before interest and taxes/Interest expense = (223,200+72,000)/72,000 = 4.1

B. Earnings per share on common stock = (Net income - Preferred dividends)/Common shares outstanding Net income = 223,200 - 32,800 = 190,400 Preferred dividends = (238,000/100)*5 = 11,900 Common shares outstanding = 57,120/8 = 7,140 = (190,400 - 11,900)/7,140 = 25

C. Price earnings ratio = Market price per share/Earnings per share = 300/25 = 12

Dividends per share of common stock = Dividends paid for common stock/No of common shares outstanding = 74,970/7,140 = 10.50

Dividend yield = Dividends per share of common stock/Market price per share = 10.50/300 = 3.50%