Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several
ID: 2480970 • 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 $640,000 long-term loan from Gulfport State Bank, $170,000 of which will be used to bolster the Cash account and $470,000 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 $ 126,000 $ 290,000
Marketable securities 0 11,000
Accounts receivable, net 659,000 440,000
Inventory 1,020,000 735,000
Prepaid expenses 34,000 36,000
Total current assets 1,839,000 1,512,000
Plant and equipment, net 2,084,600 1,470,000
Total assets $ 3,923,600 $ 2,982,000
Liabilities and Stockholders Equity
Liabilities:
Current liabilities $ 870,000 $ 440,000
Bonds payable, 12% 800,000 800,000
Total liabilities 1,670,000 1,240,000
Stockholders' equity:
Common stock, $20 par 830,000 830,000
Retained earnings 1,423,600 912,000
Total stockholders’ equity 2,253,600 1,742,000
Total liabilities and equity $ 3,923,600 $ 2,982,000
Sabin Electronics
Comparative Income Statement and Reconciliation
This Year Last Year
Sales $ 5,700,000 $ 4,770,000
Cost of goods sold 4,015,000 3,590,000
Gross margin 1,685,000 1,180,000
Selling and administrative expenses 681,000 576,000
Net operating income 1,004,000 604,000
Interest expense 96,000 96,000
Net income before taxes 908,000 508,000
Income taxes (30%) 272,400 152,400
Net income 635,600 355,600
Common dividends 124,000 103,000
Net income retained 511,600 252,600
Beginning retained earnings 912,000 659,400
Ending retained earnings $ 1,423,600 $ 912,000
1. Find earnings per share for both years. No change in common stock over last year (round to 2 decimal places)
2. Find the dividend yield ratio for both years. Company stock is currently selling for $60 per share; last year it was $55 per share.
3. Find the dividend payout ratio for both years.
4. Find the price-earnings ratio for both years.
5. Book value per share of common stock for both years
6. Find the gross margin percentage for both years
7. Find the net profit margin percentage for both years.
8. Find the return on total assets for both years (total assets at the beginning of last year were $2,942,000)
9. Find the return on equity for both years (Stockholders' equity at the beginning of last year was $1,732,000)
Is the company's financial leverage positive or negative?
Explanation / Answer
*no. of equity shares=Equity share capital/price per share
Dividend per share=Dividend/no. of shares
Earning per share=income after taxes and preference dividend/no. of equity shares.
1 Earnings Per Share Ratio Net Profit After Tax & Preference Dividend /No of Equity Shares 635,600 / 41,500 15.32 Net Profit After Tax & Preference Dividend 635,600 No of Equity Shares 41,500 Earnings Per Share Ratio Net Profit After Tax & Preference Dividend /No of Equity Shares 355,600 / 41,500 8.57 Net Profit After Tax & Preference Dividend 355,600 No of Equity Shares 41,500 2 Dividend Yield Ratio Dividend Per Share/ Market Value Per Share X 100 2.99 / 60 4.98% Dividend Per Share 2.988 Market Value Per Share 60 Dividend Yield Ratio Dividend Per Share/ Market Value Per Share X 100 2.48/ 55 4.51% Dividend Per Share 2.49 Market Value Per Share 55 3 Dividend Pay Out Ratio Dividend Per Equity Share/Earning Per Equity Share X 100 2.99 / 15.32 19.52% Dividend Per Equity Share 2.99 Earning Per Equity Share(635600/41500) 15.315663 Dividend Pay Out Ratio Dividend Per Equity Share/Earning Per Equity Share X 100 2.48 / 8.57 28.94% Dividend Per Equity Share 2.48 Earning Per Equity Share(355600/41500) 8.5686747 4 Price Earnings Ratio Market Price Per Share Equity Share/ Earning Per Share X 100 60 / 15.32 3.92 Market Price Per Share Equity Share 60 Earning Per Share 15.32 Price Earnings Ratio Market Price Per Share Equity Share/ Earning Per Share X 100 55 / 8.57 6.42 Market Price Per Share Equity Share 55 Earning Per Share 8.57