Question

The income statement for the Carolina Service Company for the year ended December 31, 2017, appears below. Sales revenue $670,000 Cost of goods sold 390,000 Gross profit 280,000 Expenses 180,000 * Net income $100,000 *Includes $25,000 of interest expense and $20,000 of income tax expense. Additional information: 1. Common stock outstanding on January 1, 2017, was 50,000 shares. On July 1, 2017, 10,000 more shares were issued. 2. The market price of Carolina's stock was $22 at the end of 2017. 3. Cash dividends of $35,000 were paid, $5,000 of which were paid to preferred stockholders. Compute the following ratios for 2017: (Round earnings per share to 2 decimal places, e.g. 2.25 and all other answers to 1 decimal place e.g. 15.5.) (a) Earnings per share $ (b) Price-earnings times (c) Times interest earned times

Answer 1

Answer:

(a) $1.73

(b) 12.74

(c) 5.80

Explanation:

Given that,

Sales revenue = $670,000

Cost of goods sold = 390,000

Gross profit = 280,000

Expenses = 180,000  

Net income = $100,000

Interest expense = $25,000

Income tax expense = $20,000

(a) Earnings per share:

= (Net income - Preferred dividend) ÷ Weighted average common stock

= ($100,000 - $5,000) ÷ 55,000

= $95,000 ÷ 55,000

= $1.73

(b) Price-earnings:

= Stock price ÷ Earnings per share

= $22 ÷ $1.73

= 12.74

(c) Income before interest and taxes:

= Net income + Interest expense + Income taxes

= $100,000 + $25,000 + $20,000

= $145,000

Times interest earned:

=  Income before interest and taxes ÷ Interest expenses

= $145,000 ÷ $25,000

= 5.80