Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several
ID: 2486124 • 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
Particulars This Year Last Year Cash 82000 180000 Marketable Securities 0 21000 Accounts Receivables 516000 330000 Inventory 980000 625000 Prepaid Expenses 22000 25000 Total Current Assets 1600000 1181000 Plant & Eqipment 1570200 1400000 Total assets 3170200 2581000 Current Liabilities 815000 460000 Bonds Payable 750000 750000 1565000 1210000 Common Stock 720000 720000 Retained Earning 885200 651000 1605200 1371000 Total Liabilities 3170200 2581000 Sales 5150000 4440000 Cost of goods sold 3905000 3480000 Gross Margin 1245000 960000 Selling Expenses 659000 554000 Earning before Interest and tax 586000 406000 Interest Expenses 90000 90000 Earning before tax 496000 316000 Income Tax 148800 94800 Earning for equity shareholder 347200 221200 Common Dividend 113000 92000 Retained Earning 234200 129200 Begning Retained Earning 651000 521800 Closing Retained Earning 885200 651000 a. EPS = Earning for equity shareholder/no.of shares 4.82 3.07 (347200/72000) (221200/72000) b. Dividend Yield Ratio = DPS / Market Price * 100 2.85 2.56 DPS = Dividend Amount / no. of shares 1.57 1.28 Market Value of share 55 50 c. Dividend Payount Ratio = DPS / EPS *100 32.5 41.6 d. Price Earning Ratio = Price of share / EPS 11.41 16.27 a. Gross profit margin = Gross profit / sales *100 24.17 21.62 b. Net profit margin = net profit / sales *100 9.63 7.12 Particulars This Year Last Year Cash 82000 180000 Marketable Securities 0 21000 Accounts Receivables 516000 330000 Inventory 980000 625000 Prepaid Expenses 22000 25000 Total Current Assets 1600000 1181000 Plant & Eqipment 1570200 1400000 Total assets 3170200 2581000 Current Liabilities 815000 460000 Bonds Payable 750000 750000 1565000 1210000 Common Stock 720000 720000 Retained Earning 885200 651000 1605200 1371000 Total Liabilities 3170200 2581000 Sales 5150000 4440000 Cost of goods sold 3905000 3480000 Gross Margin 1245000 960000 Selling Expenses 659000 554000 Earning before Interest and tax 586000 406000 Interest Expenses 90000 90000 Earning before tax 496000 316000 Income Tax 148800 94800 Earning for equity shareholder 347200 221200 Common Dividend 113000 92000 Retained Earning 234200 129200 Begning Retained Earning 651000 521800 Closing Retained Earning 885200 651000 a. EPS = Earning for equity shareholder/no.of shares 4.82 3.07 (347200/72000) (221200/72000) b. Dividend Yield Ratio = DPS / Market Price * 100 2.85 2.56 DPS = Dividend Amount / no. of shares 1.57 1.28 Market Value of share 55 50 c. Dividend Payount Ratio = DPS / EPS *100 32.5 41.6 d. Price Earning Ratio = Price of share / EPS 11.41 16.27 a. Gross profit margin = Gross profit / sales *100 24.17 21.62 b. Net profit margin = net profit / sales *100 9.63 7.12 Particulars This Year Last Year Cash 82000 180000 Marketable Securities 0 21000 Accounts Receivables 516000 330000 Inventory 980000 625000 Prepaid Expenses 22000 25000 Total Current Assets 1600000 1181000 Plant & Eqipment 1570200 1400000 Total assets 3170200 2581000 Current Liabilities 815000 460000 Bonds Payable 750000 750000 1565000 1210000 Common Stock 720000 720000 Retained Earning 885200 651000 1605200 1371000 Total Liabilities 3170200 2581000 Sales 5150000 4440000 Cost of goods sold 3905000 3480000 Gross Margin 1245000 960000 Selling Expenses 659000 554000 Earning before Interest and tax 586000 406000 Interest Expenses 90000 90000 Earning before tax 496000 316000 Income Tax 148800 94800 Earning for equity shareholder 347200 221200 Common Dividend 113000 92000 Retained Earning 234200 129200 Begning Retained Earning 651000 521800 Closing Retained Earning 885200 651000 a. EPS = Earning for equity shareholder/no.of shares 4.82 3.07 (347200/72000) (221200/72000) b. Dividend Yield Ratio = DPS / Market Price * 100 2.85 2.56 DPS = Dividend Amount / no. of shares 1.57 1.28 Market Value of share 55 50 c. Dividend Payount Ratio = DPS / EPS *100 32.5 41.6 d. Price Earning Ratio = Price of share / EPS 11.41 16.27 a. Gross profit margin = Gross profit / sales *100 24.17 21.62 b. Net profit margin = net profit / sales *100 9.63 7.12