Question

Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several electronic devices on which he had secured patents. Although the company has been fairly profitable, it is now experiencing a severe cash shortage. For this reason, it is requesting a $500,000 long-term loan from Gulfport State Bank, $100,000 of which will be used to bolster the Cash account and $400,000 of which will be used to modernize equipment. The company’s financial statements for the two most recent years follow:

Sabin Electronics
Comparative Balance Sheet
	This Year		Last Year
Assets
Current assets:
Cash	$	70,000	$	150,000
Marketable securities		0		18,000
Accounts receivable, net		480,000		300,000
Inventory		950,000		600,000
Prepaid expenses		20,000		22,000
Total current assets		1,520,000		1,090,000
Plant and equipment, net		1,480,000		1,370,000
Total assets	$	3,000,000	$	2,460,000
Liabilities and Stockholders Equity
Liabilities:
Current liabilities	$	800,000	$	430,000
Bonds payable, 12%		600,000		600,000
Total liabilities		1,400,000		1,030,000
Stockholders' equity:
Common stock, $15 par		750,000		750,000
Retained earnings		850,000		680,000
Total stockholders’ equity		1,600,000		1,430,000
Total liabilities and equity	$	3,000,000	$	2,460,000

Sabin Electronics
Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales	$	5,000,000	$	4,350,000
Cost of goods sold		3,875,000		3,450,000
Gross margin		1,125,000		900,000
Selling and administrative expenses		653,000		548,000
Net operating income		472,000		352,000
Interest expense		72,000		72,000
Net income before taxes		400,000		280,000
Income taxes (30%)		120,000		84,000
Net income		280,000		196,000
Common dividends		110,000		95,000
Net income retained		170,000		101,000
Beginning retained earnings		680,000		579,000
Ending retained earnings	$	850,000	$	680,000

During the past year, the company introduced several new product lines and raised the selling prices on a number of old product lines in order to improve its profit margin. The company also hired a new sales manager, who has expanded sales into several new territories. Sales terms are 2/10, n/30. All sales are on account.

Assume that Paul Sabin has asked you to assess his company’s profitability and stock market performance.

Required:
1.	You decide first to assess the company’s stock market performance. For both this year and last year, compute:

a.	The earnings per share. There has been no change in common stock over the last two years.(Round your answers to 2 decimal places.)

           

b.	The dividend yield ratio. The company’s stock is currently selling for $40 per share; last year it sold for $36 per share. (Do not round intermediate calculations. Round your percentage answers to 1 decimal place (i.e., 0.123 should be entered as 12.3).)

             

c.	The dividend payout ratio. (Do not round intermediate calculations. Round your percentage answers to 1 decimal place (i.e., 0.123 should be entered as 12.3).)

             

d.	The price-earnings ratio. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

             

e.	The book value per share of common stock. (Round your answers to 2 decimal places.)

             

2.	You decide next to assess the company’s profitability. Compute the following for both this year and last year:

a.	The gross margin percentage. (Round your percentage answers to 1 decimal place (i.e., 0.123 should be entered as 12.3).)

           

b.	The net profit margin percentage. (Round your percentage answers to 1 decimal place (i.e., 0.123 should be entered as 12.3).)

           

c.	The return on total assets. (Total assets at the beginning of last year were $2,300,000.) (Round your percentage answers to 1 decimal place (i.e., 0.123 should be entered as 12.3).)

           

d.	The return on equity. (Stockholders’ equity at the beginning of last year was $1,329,000.) (Round your percentage answers to 1 decimal place (i.e., 0.123 should be entered as 12.3).)

             

e.	Is the company’s financial leverage positive or negative?
	Positive Negative

Answer 1

Answer 1(a)
	Computation of Earning Per Share      ( in $)
	Detail	Current year	Last Year
	Net Earning	280,000	196,000
	No. of Equity Share	50,000	50,000
	( 750000/15)
	EPS	5.60	3.92
	(Earning/No. of Share)
Answer 1(b)	Computation of Dividend Per Share           ( in $)
	Detail	Current year	Last Year
	Total Dividend	110,000	95,000
	No. of Equity Share	50,000	50,000
	( 750000/15)
	Divend Per Share	2.2	1.9
	(Dividend/No. of Share)
	Current Price of Share	40	36
	Dividend Yield Ratio	5.5	5.3
	( Dividend per Share/Current Price of Share)
Answer 1(c)	Computation of Dividend Payout Ratio     (in $)
	Detail	Current year	Last Year
	Total Dividend	110,000	95,000
	Net Earning	280,000	196,000
	Dividend Payout Ratio	39.3	48.5
	(Dividend/Earning )
Answer 1(d)	Computation of Earning Per Share            (in $)
	Detail	Current year	Last Year
	Earning Per Share	280,000	196,000
	No. of Equity Share	50,000	50,000
	( 750000/15)
	EPS	5.6	3.92
	(Earning/No. of Share)
	Current Price of Share	40	36
	Price Earning Ratio	7.14	9.18
	( Current Price of Share/Earning Per Share)
Answer 1(e)	Computation of Book Value Per Share ( in $)
	Detail	Current Year	Last Year
	Total Stockholder Equity	1,600,000	1,430,000
	No. of Equity Share	50,000	50,000
	( 750000/15)
	Book value per share	32.00	28.60

Answer 2(a)
	Computation of Gross profit Margin Ratio   ( in $)
	Detail	Current year	Last Year
	Gross Profit	1,125,000	900,000
	Sales	5,000,000	4,350,000
	Gross profit Margin Ratio ( in %)	22.5	20.7
	(GP/sales*100)
Answer 2(b)
	Computation of Net profit Margin Ratio   ( in $)
	Detail	Current year	Last Year
	Net income	280,000	196,000
	Sales	5,000,000	4,350,000
	Gross profit Margin Ratio ( in %)	5.6	4.5
	(NP/sales*100)
Answer 2(c)
	Computation of Return on Total Asset   ( in $)
	Detail	Current year	Last Year
	Net income before interest and tax ( EBIT)	472,000	352,000
	Asset beginning of the year	2,460,000	2,300,000
	Asset at the end of the year	3,000,000.00	2,460,000.00
	Average Asset during the year	2,730,000	2,380,000
	Return on total Asset	17%	15%
	(EBIT/Average Asset*100)
Answer 2(d)
	Computation of Return on Equity   ( in $)
	Detail	Current year	Last Year
	Net Income	280,000	196,000
	Asset beginning of the year	1,430,000	1,329,000
	Asset at the end of the year	1,600,000	1,430,000
	Average Asset during the year	1,515,000	1,379,500
	Return on total Asset	18%	14%
	Net Income/Average equity
Answer 2(e)
	Calculation of company Finacial leverage
	Detail	Current year	Last Year
	Net income before interest and tax ( EBIT)	472,000	352,000
	Net Income ( EAT)	280,000	196,000
	Financial Leverage	1.69	1.80
	(EBIT/EBT)