Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several
ID: 2492645 • 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.
Do this year and last year calculations for all questions
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
1.
a.
Earnings per share = Net income/No. of common stock shares outstanding
Common stock shares outstanding = Common stock/Par value per share = $780,000/$15 = 52,000 shares
Earnings per share for this year = $511,000/52,000 = $9.83
Earnings per share for last year = $301,000/52,000 = $5.79
b.
Dividend yield = Dividend per share/Market value per share
This year
Last year
Common dividends
$ 119,000
$ 98,000
Common stock shares outstanding
52,000
52,000
Dividend per share
$ 2.29
$ 1.88
Market value per share
$ 60.00
$ 55.00
Dividend yield ratio
3.8%
3.4%
c.
Dividend payout ratio = Common dividends/Net income
Dividend payout ratio for this year = $119,000/$511,000 = 23.3%
Dividend payout ratio for last year = $98,000/$301,000 = 32.6%
d.
Price-earnings ratio = Market value per share/Earnings per share
Price-earnings ratio for this year = $60/$9.83 = 6.10
Price-earnings ratio for last year = $55/$5.79 = 9.50
e.
Book value per share = Total stockholder’s equity/Common stock shares outstanding
Book value per share for this year = $1,965,000/52,000 shares = $37.79
Book value per share for last year = $1,573,000/52,000 shares = $30.25
2.
a.
Gross margin percentage = Gross margin/Sales
Gross margin percentage for this year = $1,485,000/$5,450,000 = 27.3%
Gross margin for last year = $1,080,000/$4,620,000 = 23.4%
b.
Net profit margin percentage = Net income/Sales
Net profit margin percentage for this year = $511,000/$5,450,000 = 9.4%
Net profit margin for last year = $301,000/$4,620,000 = 6.5%
c.
Return on total assets = Net income/Average total assets
Average total assets = (Beginning total assets + Ending total assets)/2
This year
Last year
Beginning total assets
$ 2,793,000
$ 2,570,000
Ending total assets
$ 3,510,000
$ 2,793,000
Average total assets
$ 3,151,500
$ 2,681,500
Net income
$ 511,000
$ 301,000
Return on total assets
16.2%
11.2%
d.
Return on equity = Net income/Average stockholder’s equity
Average stockholder’s equity = (Beginning stockholder’s equity + Ending stockholder’s equity)/2
This year
Last year
Beginning Stockholder's equity
$ 1,573,000
$ 1,563,000
Ending Stockholder's equity
$ 1,965,000
$ 1,573,000
Average Stockholder's equity
$ 1,769,000
$ 1,568,000
Net income
$ 511,000
$ 301,000
Return on total assets
28.9%
19.2%
This year
Last year
Common dividends
$ 119,000
$ 98,000
Common stock shares outstanding
52,000
52,000
Dividend per share
$ 2.29
$ 1.88
Market value per share
$ 60.00
$ 55.00
Dividend yield ratio
3.8%
3.4%