Question

Five Measures of Solvency or ProfitabilityThe balance sheet for Garcon Inc. at the end of the current fiscal year indicated the following:

Bonds payable, 7% $1,200,000
Preferred $10 stock, $50 par 56,000
Common stock, $7 par 343,000.00
Income before income tax was $243,600, and income taxes were $36,400, for the current year. Cash dividends paid on common stock during the current year totaled $44,100. The common stock was selling for $36 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
b. Earnings per share on common stock $ _____
c. Price-earnings ratio
d. Dividends per share of common stock $ _____
e. Dividend yield _____%

Answer 1

The five measures of solvency or profitability for Garcon Inc. are: times interest earned ratio, earnings per share on common stock, price-earnings ratio, dividends per share of common stock, and dividend yield.

Step-by-step explanation:

The five measures of solvency or profitability for Garcon Inc. can be calculated as follows:

a. Times interest earned ratio: This ratio is calculated by dividing the income before income tax by the interest expense. In this case, the interest expense would be 7% of $1,200,000, which is $84,000. Therefore, the times interest earned ratio would be $243,600 / $84,000 = 2.9.

b. Earnings per share on common stock: This can be calculated by dividing the income available to common stockholders (income before income tax - income taxes) by the number of common shares outstanding. In this case, the income available to common stockholders would be $243,600 - $36,400 = $207,200. The number of common shares outstanding is 343,000. Therefore, the earnings per share on common stock would be $207,200 / 343,000 = $0.604 per share.

c. Price-earnings ratio: This ratio is calculated by dividing the market price per share (which is given as $36) by the earnings per share on common stock. In this case, the price-earnings ratio would be $36 / $0.604 = 59.6.

d. Dividends per share of common stock: This can be calculated by dividing the cash dividends paid on common stock by the number of common shares outstanding. In this case, the cash dividends paid on common stock would be $44,100. The number of common shares outstanding is 343,000. Therefore, the dividends per share of common stock would be $44,100 / 343,000 = $0.128 per share.

e. Dividend yield: This can be calculated by dividing the dividends per share of common stock by the market price per share and multiplying by 100 to get a percentage. In this case, the dividend yield would be ($0.128 / $36) * 100 = 0.3555%.