Chapter 9, Problem 9.20E

To determine

(a)

Introduction:

Accounting ratios are used to evaluate the financial performance of the business organisation.

Time interest earned TIE :

It is a matric used to measure a company's ability to meet debit obligation it can be calculated using following formula:

  $\text{Time interest earned=}\frac{\text{Earning before interest and taxes }}{\text{Total Interest payable}}$

The time interest earned.

Answer to Problem 9.20E

Solvency analysis using time interest earned suggests that the company is in good solvency position as time interest earned shows it has adequate earning to pay debt obligationswhich is 8.75 times and shareholders ratios suggest enough earnings for shareholders.

Explanation of Solution

  $\text{Time interest earned=}\frac{\text{Earning before interest and taxes }}{\text{Total Interest payable}}$

	Ratios
a	Time interest earned	$\frac{3,500,000}{400,000}=8.75$

To determine

(b)

Concept Introduction:

Time preferred dividends earned: it measures company's ability to pay preferred dividends in it also known as dividends coverage it can be calculated using following formula:

  $\text{Time preferred dividends earned=}\frac{\text{Net income }}{\text{Prefrential dividends payout}}$

To calculate:

Time preferred dividends earned

Answer to Problem 9.20E

Solvency analysis using time preferential dividends earned paid suggests that the company does not have earning to pay preferential dividends obligations which is 0.05 times.

Explanation of Solution

  $\text{Time preferred dividends earned=}\frac{\text{Net income }}{\text{Prefrential dividends payout}}$

	Ratios
b	Time preferred dividends earned	$\frac{3,400,000}{60,000,000}=0.05$

To determine

(c)

Concept Introduction:

Earnings per share: show how many dollars of net income is earned by common stockholder, it can be calculated using following formula.

  $\text{Earnings per share=}\frac{\text{Net income }}{\text{common stock outstanding}}$

To calculate:

The profit earned on each issued share using earning per share.

Answer to Problem 9.20E

Profitability analysis using earning per share suggests that the profitability position of the company is satisfactory.

Explanation of Solution

  $\text{Earnings per share=}\frac{\text{Net income }}{\text{common stock outstanding}}$

	Ratios
c	Earnings per share	$\frac{3,400,000}{3,500,000}=0.97$

To determine

(d)

Concept Introduction:

Price earnings ratio P/E ratio: it indicates the amount an investor can expect to invest in a company in order to receive one dollar of company's earnings.

  $Priceearningratio\text{=}\frac{Market value of share }{Earning per share}$

Expected price of share based on earning using price earnings ratio.

Answer to Problem 9.20E

Profitability analysis using price earning suggests that the profitability position and positive future performance.

Explanation of Solution

	Ratios
d	Price earnings ratio	$\frac{8}{1}=8$

To determine

(e)

Concept Introduction:Dividends per share:

It is the sum of ordinary dividends declared by the company.

  $\text{Dividends per share=}\frac{\text{total dividends payout }}{\text{Out standing shares}}$

Dividends per share of common stock.

Answer to Problem 9.20E

Profitability analysis using dividends per share suggests that the profitability position of the company is satisfactory and can declare dividends at the rate of 0.03.

Explanation of Solution

  $\text{Dividends per share=}\frac{\text{total dividends payout }}{\text{Out standing shares}}$

	Ratios
e	Dividends per share	$\frac{100,000}{3,500,000}=0.03$

To determine

(f)

Concept Introduction:

Dividends yield: is an estimation of dividend only return of stock investment.

  $Dividendsyield\text{=}\frac{Annual dividend}{share price}$

To calculate:

Annual dividends received per share.

Answer to Problem 9.20E

Profitability analysis using dividends yield suggests that the profitability position of the company is satisfactory, and SHI Inc. annual value of dividends received were 0.04.

Explanation of Solution

  $\mathrm{Dividends}yield=\frac{Annual dividend}{share price}$

	Ratios
f	Dividends yield	$\frac{0.03}{8}=0.4$