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, 8% $5,000,000 Preferred $4 stock, $50 par 2,500,000 Common stock, $ 10 par 5,000,000 Income before income tax was $3,000,000, and income taxes were 51,200,000 for the current year. Cash dividends paid on common stock during the current year totaled $1,200,000. The common stock was selling for $32 per share at the end of the year. Determine each of the following: (A) times interest earned ratio (B) earnings per share on common stock, (C) price-earnings ratio, (D) dividends per share of common stock, and (E) dividend yield. (Round ratios and percentages to one decimal place, except for per-share amounts.)

Q: Expert Answer

To determine Financial Ratios: Financial ratios are the metrics used to evaluate the liquidity, capabilities, profitability, and overall performance of a company. Given info: Income before income tax and interest expense. The following ratios: a. Times interest earned ratio. b. Earnings per share on the common stock. c. Price earnings ratio. d. Dividend per share of common stock. e. Dividend yield. Explanation a. Times interest earned ratio quantifies the number of times the earnings before interest and taxes can pay the interest expense. First, determine the sum of income before income tax and interest expense. Then, divide the sum by interest expense. Formula: Times-interest- earned ratio } = Income before income tax + Interest expense Interest expense Times interest earned ratio: Times-interest- earned ratio } = Income before income tax + Interest expense Interest expense = $ 3 , 000 , 000 + $ 400 , 000 $ 400 , 000 = 8.5 times Working note for determining the interest expense: Interest expense = Bonds payable × Interest rate = $5,000,000 × 8% = $400,000 b. Earnings per share help to measure the profitability of a company. Earnings per share are the amount of profit that is allocated to each share of outstanding stock. Formula: Earnings per share = Net income – Preferred dividends Weighted average number of common shares outstanding Earnings per share on the common stock: Earnings per share = [ Net income − Preferred dividends ( Weighted average shares of common stock outstanding ) ] = $ 1 , 800 , 000 − $ 20 , 000 500 , 000 shares = $ 1 , 600 , 000 50 , 000 shares = $ 3.20 Working note for determination of preferred dividends and weighted average number of common shares outstanding are provided below: Preferred dividends = Preferred stock Par value × Stock value = $ 2 , 500 , 000 $ 50 × $ 4 = $ 200 , 000 Weighted average number of common shares } = Total value of shares Par value per share = $ 5 , 000 , 000 $ 10 = 500 , 000 shares c

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Financial & Managerial Accounting

13th Edition

Carl Warren + 2 others

Publisher: Cengage Learning

ISBN: 9781285866307

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BuyFind

Financial & Managerial Accounting

13th Edition

Carl Warren + 2 others

Publisher: Cengage Learning

ISBN: 9781285866307

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To determine

Financial Ratios: Financial ratios are the metrics used to evaluate the liquidity, capabilities, profitability, and overall performance of a company.

Given info: Income before income tax and interest expense.

The following ratios:

a. Times interest earned ratio.
b. Earnings per share on the common stock.
c. Price earnings ratio.
d. Dividend per share of common stock.
e. Dividend yield.

Explanation of Solution

a.

Times interest earned ratio quantifies the number of times the earnings before interest and taxes can pay the interest expense. First, determine the sum of income before income tax and interest expense. Then, divide the sum by interest expense.

Formula:

Times-interest-earned ratio }=Income before income tax+Interest expenseInterest expense

Times interest earned ratio:

Times-interest-earned ratio }=Income before income tax+Interest expenseInterest expense=$3,000,000+$400,000$400,000=8.5 times

Working note for determining the interest expense:

Interest expense = Bonds payable × Interest rate= $5,000,000 × 8%= $400,000

b.

Earnings per share help to measure the profitability of a company. Earnings per share are the amount of profit that is allocated to each share of outstanding stock.

Formula:

Earnings per share = Net income – Preferred dividendsWeighted average number of common shares outstanding

Earnings per share on the common stock:

Earnings per share=[Net income−Preferred dividends(Weighted average shares of common stock outstanding)]=$1,800,000−$20,000500,000 shares=$1,600,00050,000 shares=$3.20

Working note for determination of preferred dividends and weighted average number of common shares outstanding are provided below:

Preferred dividends = Preferred stockPar value × Stock value= $2,500,000$50×$4=$200,000

Weighted average number of common shares }= Total value of shares Par value per share=$5,000,000$10=500,000 shares

c

Financial & Managerial Accounting

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Financial & Managerial Accounting

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Additional Business Textbook Solutions

Bonds payable, 8%	$5,000,000
Preferred $4 stock, $50 par	2,500,000
Common stock, $ 10 par	5,000,000