Question

The income statement for the Carolina Service Company for the year ended December 31, 2017, appears below. Includes $25,000 of interest expense and $20,000 of income tax expense. Additional information: Common stock outstanding on January 1, 2017, was 50,000 shares. On July 1, 2017, 10,000 more shares were issued. The market price of Carolina's stock was $22 at the end of 2017. Cash dividends of $35,000 were paid, $5,000 of which were paid to preferred stockholders. Compute the following ratios for 2017: (a) Earnings per share. (b) Price-earnings. (c) Times interest earned. (a) Earnings per share (b) Price-earnings (c) Times interest earned

Answer 1

Answer:

Earning per share = 2.166

Price earning = 10.15

Times interest earned = 5.4

Explanation:

Common stock outstanding at end =  Shares outstanding  (open) +Shares issued.

                                         = 50000+10000= 60000 outstanding shares (at end)

a.)we know that earning per share = net income - preference dividend

                                                       Common shares outstanding at end

                                          =  ( N#1)    135000  -      5000

                                                                 60000

                                          =  2.166 earning per share

(N#1):To calculate net income we will need statement of changes in equity,Suppose par value of shares  = $10,

we have Beginning equity + net income - Dividend = Equity (end)

      Net Income = 600000+35000-500000

    Net income = 135000

b.) Price earning =  Market value per share  =   22      =  10.15

                                Earning per share                2.166

c.) Times interest earned = Income before interest and taxes or EBIT

                                              Interest expense

  EBIT = 135000

                                  =     135000 /  25000  = 5.4 times