Question

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, $100 par	173,000
Common stock, $7 par	1,029,350.00

Income before income tax was $365,400, and income taxes were $54,000, for the current year. Cash dividends paid on common stock during the current year totaled $79,407. 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		times
b. Earnings per share on common stock	$
c. Price-earnings ratio
d. Dividends per share of common stock	$
e. Dividend yield		%

Answer 1

SOLUTION

A. Times interest earned ratio = (Income Before Tax + Interest Expense) / Interest Expense

= ($365,400 + $126,000) / $126,000

= $491,400 / $126,000

= 3.9 times

* Interest expense = $1,800,000 * 7% = $126,000

B. Earnings per share on common stock = (Net Income - Preferred Dividends) / Common Shares Outstanding

= ($311,400 - $17,300) / 147,050

= $294,100 / 147,050

= $2

Net income = $365,400 - $54,000 = $311,400

Preferred dividend = $173,000 * 10% = $17,300

Common Shares Outstanding = 1,029,350 / 7 = 147,050

C. Price-Earnings Ratio = Market Price per Share / Earnings per Share

= $18 / $2 = 9

D. Dividends per Share of Common Stock = Common Dividends / Common Shares Outstanding

= $79,407 / 147,050

= $0.54

E. Dividend Yield = Common Dividend per Share / Share Price

= $0.54 / $18

= 3%