Question

Here is the income statement for Larkspur, Inc.

LARKSPUR, INC. Income Statement For the Year Ended December 31, 2022

Sales revenue $443,400
Cost of goods sold 224,700
Gross profit 218,700
Expenses (including $16,700 interest and $24,600 income taxes) 87,600
Net income $131,100

Additional information:

1.Common stock outstanding January 1, 2022, was 27,600 shares, and 36,700 shares were outstanding at December 31, 2022.
2.The market price of Larkspur stock was $15 in 2022.
3.Cash dividends of $22,700 were paid, $6,900 of which were to preferred stockholders.

Required:
Compute the following measures for 2017.

a. Earnings per share:________
b. Price-earnings ratio:_________
c. Payout ratio:____________
d. Times interest earned:_______

Answer 1

a. The Earnings per share is $3.87

b. The Price-earnings ratio is 3.87 times

c. The Payout ratio is 12.21%

d. The Times interest earned is 10.32

Step-by-step explanation:

a. The Earnings per share would be calculated as follows:

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

We need to use the formula of the Weighted Average number of common shares outstanding to calculate the Preferred stock dividend.

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

= (27,600 + 36,700)/2

= 32,150

Preferred stock dividend = $6,700

Therefore, Earnings per share= (131,100 – 6,700)/32,150

= 124,400/42,150

= $3.87

b. The Price-earnings ratio would be calculated as follows:

Price - earning ratio = Market price per share / Earning per share

= $15 / $3.87 = 3.87 times

c. The Payout ratio would be calculated as follows:

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

= ($22,700 - $6,700) / $131,000 = 12.21 %

d. Times interest earned would be calculated as follows:

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

= (131,100 + 16,700 + 24,600)/16,700

= 10.32 times