Question

Here is the income statement for Teal Mountain Inc.

TEAL MOUNTAIN INC.
Income Statement
For the Year Ended December 31, 2017
Sales revenue $402,900
Cost of goods sold 256,700
Gross profit 146,200
Expenses (including $ 10,200 interest and $29,600 income taxes) 89,200
Net income $57,000
Additional information:
1. Common stock outstanding January 1, 2017, was 30,000 shares, and 39,000 shares were outstanding at December 31, 2017.
2. The market price of Teal Mountain stock was $15 in 2017.
3. Cash dividends of $24,700 were paid, $ 6,500 of which were to preferred stockholders.
Compute the following measures for 2017.
(a) Earnings per share $_____
(b) Price-earnings ratio _____ times
(c) Payout ratio _____ %
(d) Times interest earned _____ times

Answer 1

See below

Step-by-step explanation:

a. The earnings per share would be calculated as;

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

But

Weighted average number of common shares = (Number of common shares outstanding in the beginning + Number of common shares outstanding at then end) / 2

= (30,000 + 39,000) / 2

= 34,500

Preferred stock dividend = 6,500

Therefore,

Earnings per share = ($57,000 - $6,500) / 34,500

= $50,500 / 34,500

= $1.46

b. Price earnings ratio

= Market price per share / Earning per share

= $15 / $1.46

= 10.27 times

c. The payout ratio

= (Total cash dividends - Preferred stock dividends) / Net income

= ($24,700 - $6,500) / $57,000

= $18,200 / $57,00)

= 31.93%

d. Times interest

= ( Net income + Interest expense + Tax expense) / Interest expense.

= $57,000 + $10,200 + $29,600) / $10,200

= $96,800 / $10,200

= 9.49 times