Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several
ID: 2486122 • 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 $530,000 long-term loan from Gulfport State Bank, $115,000 of which will be used to bolster the Cash account and $415,000 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 $ 82,000 $ 180,000 Marketable securities 0 21,000 Accounts receivable, net 516,000 330,000 Inventory 980,000 625,000 Prepaid expenses 22,000 25,000 Total current assets 1,600,000 1,181,000 Plant and equipment, net 1,570,200 1,400,000 Total assets $ 3,170,200 $ 2,581,000 Liabilities and Stockholders Equity Liabilities: Current liabilities $ 815,000 $ 460,000 Bonds payable, 12% 750,000 750,000 Total liabilities 1,565,000 1,210,000 Stockholders' equity: Common stock, $15 par 720,000 720,000 Retained earnings 885,200 651,000 Total stockholders’ equity 1,605,200 1,371,000 Total liabilities and equity $ 3,170,200 $ 2,581,000 Sabin Electronics Comparative Income Statement and Reconciliation This Year Last Year Sales $ 5,150,000 $ 4,440,000 Cost of goods sold 3,905,000 3,480,000 Gross margin 1,245,000 960,000 Selling and administrative expenses 659,000 554,000 Net operating income 586,000 406,000 Interest expense 90,000 90,000 Net income before taxes 496,000 316,000 Income taxes (30%) 148,800 94,800 Net income 347,200 221,200 Common dividends 113,000 92,000 Net income retained 234,200 129,200 Beginning retained earnings 651,000 521,800 Ending retained earnings $ 885,200 $ 651,000 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 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. Required: 1. You decide first to assess the company’s 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 company’s stock is currently selling for $55 per share; last year it sold for $50 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 company’s 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 $2,390,000.) (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).) d. The return on equity. (Stockholders’ equity at the beginning of last year was $1,361,000.) (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).) e. Is the company’s financial leverage positive or negative? Positive Negative
Explanation / Answer
Answer Balance sheet This Year Last year Assets Current Assets Cash 82000 180000 Marketabe Securities 0 21000 Account Receivable 516000 330000 Inventory 980000 625000 Prepaid expenses 22000 25000 Total Current Assets 1600000 1181000 Plant & Equipment 1570200 1400000 Total Assets 3170200 2581000 Liabilities & Stock holder Equity Current Liabilities 815000 460000 Bonds Payable 12% 750000 750000 Total Liabilities 1565000 1210000 Stock Holder equity Common Stock @ $ 15 720000 720000 Retained Earning 885200 651000 Total Stock Holder equity 1605200 1371000 Total Liabilities and Equity 3170200 2581000 Income Statement Sales 5150000 4440000 Cost of Goods sold 3905000 3480000 Gross Margin 1245000 960000 Selling & administrative exp 659000 554000 Net Operating Income 586000 406000 Interest Exp. 90000 90000 Net Income before tax 496000 316000 Income tax (30%) 148800 94800 Net Income 347200 221200 Common Dividend 113000 92000 Net Income retained 234200 129200 Beginning Retained earning 651000 521800 Ending retained earning 885200 651000 No. of share out standing (720000/15) 48000 48000 Market value per share 55 50 Dividend per share 2.35 1.92 Avg Total Assets 2875600 2485500 Avg Share Holder equity 1488100 1366000 1a Earning Per Share 7.23 4.61 (Net Income/no. of share outstanding) 1b Dividend Yield Ratio Cash dividend per share /market value per share 4.3% 3.8% 1c Dividend Payout Ratio Total Dividends/Net Income 32.5% 41.6% 1d The Price Earning Ratio Market Value Pershare/Earning per Share 7.60 10.85 1e Book Value per share Stock holder equity/no.of common share outstanding 33.44 28.56 2a Gross Margin percentage Gross Margin/Net Sales *100 24.2% 21.6% 2b Net Profit Margin percentage Net Profit/Net Sales *100 6.7% 5.0% 2c The Return on total assets Net Income /avg total assets 12.1% 8.9% 2d The Return on Equity Net Income /avg share holder equity 23.3% 16.2% 2 e Fincial leverage Positive Positive