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 $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

Answer 1

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