Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several
ID: 2467479 • 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 $500,000 long-term loan from Gulfport State Bank, $100,000 of which will be used to bolster the Cash account and $400,000 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 $40 per share; last year it sold for $36 per share. (Do not round intermediate calculations. Round your percentage answers to 1 decimal place (i.e., 0.123 should be entered as 12.3).)
The dividend payout ratio. (Do not round intermediate calculations. Round your percentage answers to 1 decimal place (i.e., 0.123 should be entered as 12.3).)
The price-earnings ratio. (Do not round intermediate calculations. 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., 0.123 should be entered as 12.3).)
The net profit margin percentage. (Round your percentage answers to 1 decimal place (i.e., 0.123 should be entered as 12.3).)
The return on total assets. (Total assets at the beginning of last year were $2,300,000.) (Round your percentage answers to 1 decimal place (i.e., 0.123 should be entered as 12.3).)
The return on equity. (Stockholders’ equity at the beginning of last year was $1,329,000.) (Round your percentage answers to 1 decimal place (i.e., 0.123 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 $500,000 long-term loan from Gulfport State Bank, $100,000 of which will be used to bolster the Cash account and $400,000 of which will be used to modernize equipment. The company’s financial statements for the two most recent years follow:
Explanation / Answer
Answer Formula This Year This Year Last Year Last Year Answer 1 (a) Earning Per Share Net Income/Common Share Outstanding 280000/50000 5.60 196000/50000 3.92 (b) Dividend Yield Ratio Cash Dividend /Market value 2.20/40 5.5% 1.90/36 5.3% c Dividend payout Ratio Total Dividend/Net Income 110000/280000 39.3% 95000/196000 48.5% (d) The Price Earning Ratio Market Value per share/EPS 40/5.60 7.14 36/3.92 9.18 (e) Book Value Per Share Stock holder Equity/ Common share outstanding 1600000/50000 32.00 1430000/50000 28.60 Answer 2 (a) Gross Margin percentage Gross Margin/Net Sales *100 1125000/5000000 22.5% 900000/4350000 20.7% (b) Net Profit Margin percentage Net Profit/ Net Sales *100 280000/5000000 5.6% 196000/4350000 4.5% c The Return on total assets Net Income /Avg total assets 280000/2730000 10.3% 196000/2380000 8.2% (d) The Return on Equity Net Income / Share Holder Equity 280000/1515000 18.5% 196000/1379500 14.2% (e) Company Finacial Leverage Interest exepnses covered by return using from debts Positive