Six Measures of Solvency or Profitability The balance sheet for Bearing Industri
ID: 2451266 • Letter: S
Question
Six Measures of Solvency or Profitability The balance sheet for Bearing Industries Inc. at the end of the current fiscal year indicated the following: Bonds payable, 10% (issued in 2006, due in 2026) Preferred $10 stock, $50 par Common stock, $8 par Income before income tax was $561,000, and income taxes were $84,100, for the current year. Cash dividends paid on common stock during the current year totaled $47,439. The common stock was selling for $14 per share at the end of the year. Determine each of the following. Round answers to one decimal place, except for dollar amounts which should be rounded to the nearest whole cent. Use the rounded answers for subsequent requirements, if required. $1,700,000 125,500 1,807,200 Number of times bond interest charges are earned. Number of times preferred dividends are earned. Earnings per share on common stocked. Price-earnings ratio Dividends per share of common stock Dividend yield times %Explanation / Answer
a.
Bond interest charges = $1,700,000 x 10% = $170,000
Net income before interest and taxes = $561,000 + $170,000 = $731,000
Therefore,
Number of times bond interest charges are earned = $731,000 / $170,000 = 4.3
b.
Preferred dividend = $10 x 2,500 shares of preferred stock = $25,000
Income after taxes = $561,000 - $84,100 = $476,900
Therefore,
Number of times preferred dividends are earned = $476,900 / $25,000 = 19
(c)
Earnings after taxes and preferred dividends = $561,000 - $84,100 - $25,000 = $451,900
Number of shares of common stock outstanding = $1,807,200 / $8 = 225,900
Therefore,
Earnings per share = $451,900 / 225,900 = $2
(d)
Market price per share of common stock = $14
Eanrings per share = $2
Therefore,
Price-earnings ratio = $14 / $2 = 7