Question

Here is the income statement for Myers, Inc.

Myers, Inc. Income Statement For the Year Ended December 31, 2020
Sales revenue		$434,000
Cost of goods sold		222,000
Gross profit		212,000
Expenses (including $10,000 interest and $20,500 income taxes)		82,000
Net income		$ 130,000

Additional information:

1.		Common stock outstanding January 1, 2020, was 16,000 shares, and 24,000 shares were outstanding at December 31, 2020.
2.		The market price of Myers stock was $13.75 in 2020.
3.		Cash dividends of $27,300 were paid, $5,000 of which were to preferred stockholders.

Compute the following measures for 2020. (Round Earnings per share to 2 decimal places, e.g. 1.65, and all other answers to 1 decimal place, e.g. 6.8 or 6.8%.)

(a)		Earnings per share		$
(b)		Price-earnings ratio			times
(c)		Payout ratio			%
(d)		Times interest earned			times

Answer 1

(a)

Average number of common shares outstanding = (Number of common shares outstanding in the beginning + Number of common shares outstanding in the end)/2

= (16,000 + 24,000)/2

= 20,000

Earnings per share = (Net income – Preferred stock dividend)/Average number of common shares outstanding

= (130,000 – 5,000)/20,000

=125,000/20,000

= $6.25

(b)

Price earnings ratio = Market price of 1 common share/Earnings per share

= 13.75/6.25

= 2.2 times

(c)

Payout ratio = Cash dividends/Net income

= 27,300/130,000

= 21%

(d)

Times interest earned = (Net income + Interest expense + Tax expense)/Interest expense

= (130,000 + 10,000 + 20,500)/10,000

= 160,500/10,000

= 16.05 times