Print Item Five Measures of Solvency or Profitability The balance sheet for Garc

Question

Print Item Five Measures of Solvency or Profitability The balance sheet for Garcon Inc. at the end of the current fiscal year indicated the following: Preferred $5 stock, $50 par Common stock, $8 par $800,000 107,000 46,224 Income before income tax was $182,400, and income taxes were $27,250, for the current year. Cash dividends paid on common stock during the current year totaled $40,446. The common stock was selling for $200 per share at the end of the year. Determine each rounded answers for subsequent requirements, if required. of the following. Round answers to one decimal place, except for dollar amounts which should be rounded to the nearest whole cent. Use the b. Earnings per share on times d. Dividends per share of common stock idend yield 3:47 PM

Explanation / Answer

a. Times interest earned ratio: 4.8 times

b. Earnings per share on common stock: $25.00

c. Price-earnings ratio: 8.0

d. Dividends per share of common stock: $7.00

e. Dividend yield: 3.5%

Workings:

a. Times interest earned ratio = Income before interest and income tax / Interest = $230400 / $48000 = 4.8 times

Income before income tax = $182400

Interest = $800000 x 6% = $48000

Income before interest and income tax = Income before income tax + Interest = $182400 + $48000 = $230400

b. Earnings per share on common stock = (Net income – Preferred dividends) / Number of outstanding common stock = $144450 / 5778 = $25

Net income = Income before income tax – Income tax = $182400 - $27250 = $155150

Preferred dividends = $107000 / $50 x $5 = 2140 shares x $5 = $10700

Net income – Preferred dividends = $155150 - $10700 = $144450

Number of outstanding common stock = $46224 / $8 = 5778 shares

c. Price-earnings ratio = Market price per share / Earnings per share = $200 / $25 = 8

d. Dividends per share of common stock = Total dividends / Number of common stock outstanding = $40446 / 5778 = $7

e. Dividend yield = Dividend per share / Market price per share = $7 / $200 = 3.5%

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