Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several
ID: 2452995 • 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 $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:
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.
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 $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).)
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 $2,570,000.) (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 $1,563,000.) (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)
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 $445,000 of which will be used to modernize equipment. The company’s financial statements for the two most recent years follow:
Explanation / Answer
Solution:
(1) Assessment of the company’s stock market performance, for both this year and last year:
(a) Earnings per share
= (Net Income - Dividends on Preferred Stock) / Average outstanding common shares*
This year
Last year
= ($ 511,000-0) / 52,000
= ($301,000 – 0) /52,000
= $ 9.83 (Answer)
= $ 5.79 (Answer)
Note: As there is no preferred stock, preferred dividend will be zero.
* Outstanding common shares this year = Common stock value / Par value per share
= $ 780,000 / $ 15
= 52,000 common shares
As there is no change in common stock over last two years so outstanding common shares last year would had been 52,000.
Average outstanding common shares:
= (Outstanding common shares this year + Outstanding common shares last year) / 2
= (52,000 + 52,000) / 2
= 52,000 shares
(b) Dividend Yield Ratio
=*Dividend per Share / Current Share Price x100
This year
Last year
= $ 2.28 / $ 60 X 100
= $ 1.88 / $ 55 X 100
= 3.8 % (Answer)
= 3.4 % (Answer)
*Dividend per Share = Common dividends / Outstanding common shares
This year = $ 119,000/ 52,000 common shares = $ 2.28 per share
Last year = $ 98,000/ 52,000 common shares = $ 1.88 per share
For calculation of outstanding common shares refer solution of part (a).
(c) Dividend Payout Ratio
= Dividend per Share / Earnings per Share X 100
This year
Last year
= $ 2.28 / $ 9.83 X 100
= $ 1.88 / $ 5.79 X 100
= 23.2 % (Answer)
= 32.5 % (Answer)
For calculation of dividend per share refer solution of part (b) and for earning per share refer solution of part (a).
(d) Price-Earnings Ratio
= Market Value per Share / Earnings per Share
This year
Last year
= $ 60 / $ 9.83
= $ 55 / $ 5.79
= 6.10 (Answer)
= 9.50 (Answer)
For earning per share refer solution of part (a) and market value is the stock price which is given in part (b) question.
(e) Book value per share of common stock
=Total shareholders’ equity / Total outstanding common shares
This year
Last year
= $ 1,965,000 / 52,000
= $ 1,573,000 / 52,000
= $ 37.79 (Answer)
= $ 30.25 (Answer)
For calculation of outstanding common shares refer solution of part (a).
(2) Assessment of company’s profitability, for both this year and last year:
(a) Gross Margin Percentage
= Gross margin / Sales X 100
This year
Last year
= $ 1,485,000 / $ 5,450,000 X 100
= $ 1,080,000 / $ 4,620,000 X 100
= 27.2 % (Answer)
= 23.4 % (Answer)
(b) Net Profit Margin Percentage
=Net Income / Sales X 100
This year
Last year
= $ 511,000 / $ 5,450,000 X 100
= $ 301,000 / $ 4,620,000 X 100
= 9.4 % (Answer)
= 6.5 % (Answer)
(c) Return on Total Assets
= Net income / *Average total assets X 100
This year
Last year
= $ 511,000 / $ 3,151,500 X 100
= $ 301,000 / $ 2,681,500 X 100
= 16.2 % (Answer)
= 11.2 % (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
= ( $3,510,000 + $ 2,793,000) /2
= ( $2,793,000+ $ 2,570,000) /2
= $ 6,303,000 /2
= $ 5,363,000 /2
= $ 3,151,500
= $ 2,681,500
(d) Return on Equity
= Net income / *Average stockholder's equity X 100
This year
Last year
= $ 511,000 / $ 1,769,000 X 100
= $ 301,000 / $ 1,568,000 X 100
= 28.9 % (Answer)
= 19.2 % (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
= ( $ 1,965,000 + $ 1,573,000 ) /2
= ( $ 1,573,000 + $ 1,563,000) /2
= $ 3,538,000 /2
= $ 3,136,000 /2
= $ 1,769,000
= $ 1,568,000
If you have any query, kindly leave a messgae.
Good luck.
This year
Last year
= ($ 511,000-0) / 52,000
= ($301,000 – 0) /52,000
= $ 9.83 (Answer)
= $ 5.79 (Answer)