Bonds payable, 8% (issued in 2004, due in 2024) $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 $1,200,000 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) number of times bond interest charges are earned, (b) number of times preferred dividends are earned, (c) earnings per share on common stock, (d) price-earnings ratio, (e) dividends per share of common stock, and (f) dividend yield. Round to one decimal place, except earnings per share, which should be rounded to two decimal places.
Answer:
a. Number of Times Bond = Income Before Income Tax + Interest Expense
Interest Charges Are Earned
$3,000,000 + $400,000 * = $400,000
* $5,000,000 bonds payable × 8%
8.5 times
Interest Expense
b. Number of Times Preferred
Dividends Are Earned =
$1,800,000*
$200,000** =
Net Income
Preferred Dividends
9.0 times
* $3,000,000 income before income tax – $1,200,000 income taxes
** ($2,500,000 ÷ $50 par value per share) × $4
c. Earnings per Share
on Common Stock = Net Income – Preferred Dividends
Common Stock Outstanding
$1,800,000 – $200,000
500,000 shares
d. Price-Earnings Ratio
$32.00
$3.20
= $3.20
= Market Price per Share of Common Stock
Earnings per Share
= 10.0
e. Dividends per Share
of Common Stock = Dividends on Common Stock
Shares of Common Stock Outstanding
$1,200,000
500,000 shares* =
* $5,000,000 ÷ $10 par value per share
f. Dividend Yield =
$2.40
Dividends per Share of Common Stock
Market Price per Share of Common Stock
$2.40
$32.00 = 7.5%