Exercise 14-9 The income statement for Sutherland, Inc., appears below. SUTHERLA

Question

Exercise 14-9 The income statement for Sutherland, Inc., appears below. SUTHERLAND, INC Income Statement For the Year Ended December 31, 2017 Net sales Cost of goods sold Gross profit Expenses (including $16,000 interest and $24,000 income taxes) 105,000 Net income 400,000 230,000 170,000 $ 65,000 Additional information 1. 2. 3. The weighted-average common shares outstanding in 2017 were 30,000 shares. The market price of Sutheriand, Inc. stock was $13 in 2017. Cash dividends of $26,000 were paid, $5,000 of which were to preferred stockholders. Compute the following ratios for 2017. (Round Earnings per share to 2 decimal places,e.g. 1.65, and all other answers to 1 decimal place, e.g. 6.8 or 6.89%.) (a) Earnings per share (b) Price-earnings ratio (c) Payout ratio (d) Times interest earned times times Policy 1 .2000 2018 John Wiley &Sons.; înc. All Rights Reserved. A Division of John yneY & Sons.Inc. Versia

Explanation / Answer

Solution :

(a) Earning per share = (Net Income - Preferred Dividend ) ÷ weighted average common shares o/s

= ($65,000 - $5,000) ÷ 30,000

= $2

(b) Price earning ratio = Market Price ÷ Earninng per share

= $13 ÷ $2

= 6.5 Times

(c) Dividend paid per share = $21,000 ÷ 30,000 = $0.7

Payout ratio = Dividend paid per share ÷ Earning per share

= 0.7 ÷ 2

= 35%

(d) Times interest earned = Earning before interest & tax ÷ interest expense

= ($65,000 - $16,000 - $24,000) ÷ $16,000

= $25,000 ÷ $16,000

= 1.6 Times

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