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 $620,000 long-term loan from Gulfport State Bank, $160,000 of which will be used to bolster the Cash account and $460,000 of which will be used to modernize equipment. The companyâs financial statements for the two most recent years follow:
Sabin Electronics Comparative Balance Sheet This Year Last Year Assets Current assets: Cash $ 118,000 $ 270,000 Marketable securities 0 30,000 Accounts receivable, net 633,000 420,000 Inventory 1,065,000 715,000 Prepaid expenses 30,000 34,000 Total current assets 1,846,000 1,469,000 Plant and equipment, net 1,969,200 1,490,000 Total assets $ 3,815,200 $ 2,959,000 Liabilities and Stockholders Equity Liabilities: Current liabilities $ 820,000 $ 420,000 Bonds payable, 12% 850,000 850,000 Total liabilities 1,670,000 1,270,000 Stockholders' equity: Common stock, $15 par 810,000 810,000 Retained earnings 1,335,200 879,000 Total stockholdersâ equity 2,145,200 1,689,000 Total liabilities and equity $ 3,815,200 $ 2,959,000
Sabin Electronics Comparative Income Statement and Reconciliation This Year Last Year Sales $ 5,600,000 $ 4,710,000 Cost of goods sold 3,995,000 3,570,000 Gross margin 1,605,000 1,140,000 Selling and administrative expenses 677,000 572,000 Net operating income 928,000 568,000 Interest expense 102,000 102,000 Net income before taxes 826,000 466,000 Income taxes (30%) 247,800 139,800 Net income 578,200 326,200 Common dividends 122,000 101,000 Net income retained 456,200 225,200 Beginning retained earnings 879,000 653,800 Ending retained earnings $ 1,335,200 $ 879,000
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 companyâs profitability and stock market performance.
Required: 1. You decide first to assess the companyâs 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 companyâs stock is currently selling for $50 per share; last year it sold for $45 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 companyâs 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 $2,919,000.) (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)
d. The return on equity. (Stockholdersâ equity at the beginning of last year was $1,679,000.) (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)
e. Is the companyâs financial leverage positive or negative? Positive Negative
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 $620,000 long-term loan from Gulfport State Bank, $160,000 of which will be used to bolster the Cash account and $460,000 of which will be used to modernize equipment. The companyâs financial statements for the two most recent years follow:
Sabin Electronics | ||||
Comparative Balance Sheet | ||||
This Year | Last Year | |||
Assets | ||||
Current assets: | ||||
Cash | $ | 118,000 | $ | 270,000 |
Marketable securities | 0 | 30,000 | ||
Accounts receivable, net | 633,000 | 420,000 | ||
Inventory | 1,065,000 | 715,000 | ||
Prepaid expenses | 30,000 | 34,000 | ||
Total current assets | 1,846,000 | 1,469,000 | ||
Plant and equipment, net | 1,969,200 | 1,490,000 | ||
Total assets | $ | 3,815,200 | $ | 2,959,000 |
Liabilities and Stockholders Equity | ||||
Liabilities: | ||||
Current liabilities | $ | 820,000 | $ | 420,000 |
Bonds payable, 12% | 850,000 | 850,000 | ||
Total liabilities | 1,670,000 | 1,270,000 | ||
Stockholders' equity: | ||||
Common stock, $15 par | 810,000 | 810,000 | ||
Retained earnings | 1,335,200 | 879,000 | ||
Total stockholdersâ equity | 2,145,200 | 1,689,000 | ||
Total liabilities and equity | $ | 3,815,200 | $ | 2,959,000 |
Sabin Electronics | ||||
Comparative Income Statement and Reconciliation | ||||
This Year | Last Year | |||
Sales | $ | 5,600,000 | $ | 4,710,000 |
Cost of goods sold | 3,995,000 | 3,570,000 | ||
Gross margin | 1,605,000 | 1,140,000 | ||
Selling and administrative expenses | 677,000 | 572,000 | ||
Net operating income | 928,000 | 568,000 | ||
Interest expense | 102,000 | 102,000 | ||
Net income before taxes | 826,000 | 466,000 | ||
Income taxes (30%) | 247,800 | 139,800 | ||
Net income | 578,200 | 326,200 | ||
Common dividends | 122,000 | 101,000 | ||
Net income retained | 456,200 | 225,200 | ||
Beginning retained earnings | 879,000 | 653,800 | ||
Ending retained earnings | $ | 1,335,200 | $ | 879,000 |
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 companyâs profitability and stock market performance. |
Required: | |
1. | You decide first to assess the companyâs 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 companyâs stock is currently selling for $50 per share; last year it sold for $45 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 companyâs 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 $2,919,000.) (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).) |
d. | The return on equity. (Stockholdersâ equity at the beginning of last year was $1,679,000.) (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).) |
e. | Is the companyâs financial leverage positive or negative? | ||||
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