The balance sheet for Bearing Industries Inc. at the end of the current fiscal y

Question

The balance sheet for Bearing Industries Inc. at the end of the current fiscal year indicated the following:

Bonds payable, 10% (issued in 2000, due in 2020): $4,000,000
Preferred $5 stock, $100 par: $1,000,000
Common stock, $10 par: $2,000,000

Income before income tax was $1,000,000, and income taxes were $150,000, for the current year. Cash dividends paid on common stock during the current year totaled $200,000. The common stock was selling for $40 per share at the end of the year.
a. Number of Times Bond Interest Charges Are Earned: times
b. Number of Times Preferred Dividends Are Earned: times
c. Earnings per Share on Common Stock: (Enter as dollars and cents.) $
d. Price-Earnings Ratio:
e. Dividends per Share of Common Stock: (Enter as dollars and cents) $
f. Dividend yield: %

Explanation / Answer

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The balance sheet for Fisher Company at the end of the current fiscal year indicated the following:
Bonds payable, 10% (issued in 2000, due in 2020) $5,000,000
Preferred 10% stock, $100 par 1,000,000 Common stock, $10 par 2,000,000 Income before income tax was $1,500,000 and income taxes were $200,000, for the current year. Cash dividends paid on common stock during the current year totaled $150,000. The common stock was selling for $70 per share at the end of the year. Required:

Determine each of the following:
(1) Number of times bond interest charges are earned;
(2) Number of times preferred dividends are earned;
(3) Earnings per share on common stock;
(4) Price-earnings ratio;
(5) Dividends per share of common stock; and
(6) Dividend yield.
Round to one decimal place except earnings per share, which should be rounded to two decimal places.

Answer

(1) Number of Times Bond Interest Charges Are Earned =
(Income Before Tax + Interest Expense) / Interest Expense
($1,500,000 + $500,000) / $500,000 = 4.0 times

(2) Number of Times Preferred Dividends Are Earned = Net Income / Preferred Dividends
$1,300,000 /$100,000 = 13.0 times

(3) Earnings per Share on Common Stock = (Net Income - Preferred Dividends) / Common Shares Outstanding
($1,300,000 - $100,000) / 200,000 shares = $6.00

(4) Price-Earnings Ratio = Market Price per Share / Earnings per Share
$70 / $6.00 = 11.7

(5) Dividends per Share of Common Stock =
Common Dividends / Common Shares Outstanding
$150,000 / 200,000 shares = $0.75

(6) Dividend Yield = Common Dividend per Share / Share Price
$0.75 / $70 = 1.1%

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