Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several
ID: 2406325 • Letter: P
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 $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 company’s financial statements for the two most recent years follow:
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.
You decide first to assess the company’s stock market performance. For both this year and last year, compute:
The earnings per share. There has been no change in common stock over the last two years.(Round your answers to 2 decimal places.)
The dividend yield ratio. The company’s 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).)
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).)
The price-earnings ratio. (Round intermediate calculations to 2 decimal places. Round your answers to 2 decimal places.)
The book value per share of common stock. (Round your answers to 2 decimal places.)
You decide next to assess the company’s profitability. Compute the following for both this year and last year:
The gross margin percentage. (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)
The net profit margin percentage. (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)
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).)
The return on equity. (Stockholders’ 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).)
Explanation / Answer
1a) Earnings per share :
Earnings per share = Net income/No. of common stock shares outstanding
We know Net Income but to calculate No. of common stock shares outstanding we need to use the formula: Common stock shares outstanding = Common stock/Par value per share
Common Stock shares outstanding this year : 810,000/15 = 54,000 shares
Common Stock shares outstanding last year : 810,000/15 = 54,000 shares
Earnings per share this year : 578,200/54,000 = $10.71
Earnings per share last year : 326,200/54,000 = $6.04
1b) Dividend yield ratio:
Dividend per Share = Common dividends / Outstanding common shares
This year = $ 122,000/ 54,000 common shares = $ 2.26 per share
Last year = $ 101,000/ 54,000 common shares = $ 1.87 per share
For calculation of outstanding common shares refer solution of part (a).
Dividend yield ratio = Dividend per Share / Current Share Price x100
Dividend yield ratio this year = 2.26 / 50 * 100 = 4.52%
Dividend yield ratio last year = 1.87 / 45 * 100 = 4.15%
1c) Dividend Payout Ratio :
Dividend payout ratio : Common dividends/Net income
This year : 122,000/578,200 = 0.211 = 21.1%
Last year : 101,000/326,200 = 0.3096 = 31.0%
1d) Price earnings ratio :
Price earning ratio: Market value per share / Earnings per share
Price earnings ratio this year = 50 / 10.71 = 4.67
Price earnings ratio last year = 45 / 6.04 = 7.45
1e) Book value per share of common stock :
Book value per share of common stock: Total stockholder’s equity / Common stock shares outstanding
Book value per share of common stock this year: 2,145,200 / 54,000 = $39.73
Book value per share of common stock last year: 1,689,000 / 54,000 = $31.28
2a) Gross Margin Percentage:
Gross margin percentage: Gross margin / Sales
Gross margin percentage this year : 1,605,000 / 5,600,000 = 0.287 = 28.7%
Gross margin percentage last year : 1,140,000 / 4,710,000 = 0.242 = 24.2%
2b) Net profit margin percentage :
Net profit margin percentage: Net income / sales
Net profit margin percentage this year: 578,200 / 5,600,000 = 10.3%
Net profit margin percentage last year: 326,200 / 4,710,000 = 6.9%
2c) Return on total assets :
Return on total assets = Net income / Average total assets X 100
This year
Last year
= $ 578,200 / $ 3,387,100 X 100
= $ 326,200 / $ 2,939,000 X 100
= 17.1 % (Answer)
= 11.1 % (Answer)
*Average total assets
*Average total assets
= (Total assets at the end of this year + Total assets last year) / 2
= (Total assets of last year + Total assets at beginning of last year ) / 2
= ( $3,815,200 + $2,959,000 ) / 2
= ( $2,959,000 + $2,919,000) / 2
= $ 6,774,200 / 2
= $ 5,878,000 / 2
= $ 3,387,100
= $ 2,939,000
2d) Return on equity:
Return on equity = Net income / Average stockholder's equity X 100
This year
Last year
= $ 578,200 / $ $1,917,100 X 100
= $ 326,200 / $1,684,000X 100
= 30.2% (Answer)
= 19.4 % (Answer)
*Average stockholder's equity
*Average stockholder's equity
= (Total stockholder's equity at the end of this year + Total stockholder's equity last year) / 2
= (Total stockholder's equity of last year + Total stockholder's equity at beginning of last year ) / 2
= ( $2,145,200 + $1,689,000 ) / 2
= ( $1,689,000 + $1,679,000) / 2
= $ 3,834,200 / 2
= $ 3,368,000 / 2
= $1,917,100
= $1,684,000
2e) Interest expenses $1,02,000 are covered by return using from debts. So financial leverage is positive.
This year
Last year
= $ 578,200 / $ 3,387,100 X 100
= $ 326,200 / $ 2,939,000 X 100
= 17.1 % (Answer)
= 11.1 % (Answer)
*Average total assets
*Average total assets
= (Total assets at the end of this year + Total assets last year) / 2
= (Total assets of last year + Total assets at beginning of last year ) / 2
= ( $3,815,200 + $2,959,000 ) / 2
= ( $2,959,000 + $2,919,000) / 2
= $ 6,774,200 / 2
= $ 5,878,000 / 2
= $ 3,387,100
= $ 2,939,000