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In: Accounting

Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several electronic devices on...

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 $590,000 long-term loan from Gulfport State Bank, $145,000 of which will be used to bolster the Cash account and $445,000 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 $ 104,000 $ 240,000   
  Marketable securities 0 27,000   
  Accounts receivable, net 594,000 390,000   
  Inventory 1,035,000 685,000   
  Prepaid expenses 26,000 31,000   
  
  Total current assets 1,759,000 1,373,000   
  Plant and equipment, net 1,751,000 1,420,000   
  
  Total assets $ 3,510,000 $ 2,793,000   
  
  Liabilities and Stockholders Equity   
  Liabilities:   
  Current liabilities $ 845,000 $ 520,000   
  Bonds payable, 12% 700,000 700,000   
  
  Total liabilities 1,545,000 1,220,000   
  
  Stockholders' equity:   
  Common stock, $15 par 780,000 780,000   
  Retained earnings 1,185,000 793,000   
  
  Total stockholders’ equity 1,965,000 1,573,000   
  
  Total liabilities and equity $ 3,510,000 $ 2,793,000   
  
Sabin Electronics
Comparative Income Statement and Reconciliation
This Year Last Year
  Sales $ 5,450,000 $ 4,620,000   
  Cost of goods sold 3,965,000 3,540,000   
  
  Gross margin 1,485,000 1,080,000   
  Selling and administrative expenses 671,000 566,000   
  
  Net operating income 814,000 514,000   
  Interest expense 84,000 84,000   
  
  Net income before taxes 730,000 430,000   
  Income taxes (30%) 219,000 129,000   
  
  Net income 511,000 301,000   
  Common dividends 119,000 98,000   
  
  Net income retained 392,000 203,000   
  Beginning retained earnings 793,000 590,000   
  
  Ending retained earnings $ 1,185,000 $ 793,000   
  

     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 3/10, 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 $60 per share; last year it sold for $55 per share. (Do not round intermediate calculations. Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)


             

c.

The dividend payout ratio. (Round intermediate calculations to 2 decimal places. Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)


             

d.

The price-earnings ratio. (Round intermediate calculations to 2 decimal places. 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., 0.1234 should be entered as 12.3).)


           

b.

The net profit margin percentage. (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)


           

c.

The return on total assets. (Total assets at the beginning of last year were $2,570,000.) (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)


           

d.

The return on equity. (Stockholders’ equity at the beginning of last year was $1,563,000.) (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)


             

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

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