Problem 15-19 Financial Ratios for Assessing Profitability and Market Performanc

Question

Problem 15-19 Financial Ratios for Assessing Profitability and Market Performance [L015-5, LO15-6] 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 $670,000 long-term loan from Gulfport State Bank, $185,000 of which will be used to bolster the Cash account and $485,000 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: $ 320,000 14,000 470,000 765,000 39,000 1,608,000 1,380,000 S 2,988,000 $ 133,000 Cash Marketable securities Accounts receivable, net Inventory Prepaid expenses 698,000 1,115,000 34,000 1,980,000 2,015,600 $ 3,995,600 Total current assets Plant and equipment, net Total assets Liabilities and Stockholders Equity Liabilities: Current liabilities Bonds payable, 12% $ 885,000 750,000 1,635,000 $470,000 750,000 1,220,000 Total liabilities Stockholders' equity: 860,000 1,500,600 2,360,600 $ 3,995,600 Common stock, $20 par Retained earnings Total stockholders' equity Total liabilities and equity 860,000 908,000 1,768,000 $ 2,988,000

Explanation / Answer

Answer to Requirement 1.

Part a.

Earnings Per Share = Net available for Distribution / Common Stock Outstanding

This Year:
Common Stock Outstanding = 860,000 / 20 = 43,000 Shares
Earnings Per Share = 719,600 / 43,000
Earnings Per Share = $16.73

Last Year:
Common Stock Outstanding = 860,000 / 20 = 43,000 Shares
Earnings Per Share = 397,600 / 43,000
Earnings Per Share = $9.25

Part b.

Dividend Yield Ratio = Dividend per Share / Price per share * 100

This Year:
Dividend per share = 127,000 / 43,000
Dividend per share = $2.95
Dividend Yield Ratio = 2.95 / 60 * 100
Dividend Yield Ratio = 4.92%

Last Year:
Dividend per share = 106,000 / 43,000
Dividend per share = $2.47
Dividend Yield Ratio = 2.47 / 50 * 100
Dividend Yield Ratio = 4.94%

Part c.

Dividend Payout Ratio = Common Dividend / Net Income

This Year:
Dividend Payout Ratio = $127,000 / $719,600
Dividend Payout Ratio = 17.65%

Last Year:
Dividend Payout Ratio = $106,000 / $397,600
Dividend Payout Ratio = 26.66%

Part d.

Price-earnings Ratio = Current Price / Earnings per share

This Year:
Price-earnings Ratio = $60 / $16.73
Price-earnings Ratio = 3.59

Last Year:
Price-earnings Ratio = $50 / $9.25
Price-earnings Ratio = 5.41

Answer to Requirement 2.

Part a.

Gross Margin percentage = Gross Margin / Sales * 100

This Year:
Gross Margin percentage = 1,805,000 / 5,850,000 * 100
Gross Margin percentage = 30.85%

Last Year:
Gross Margin percentage = 1,240,000 / 4,860,000 * 100
Gross Margin percentage = 25.51%

Part b.

Net Margin percentage = Net Margin / Sales * 100

This Year:
Net Margin percentage = 719,600 / 5,850,000 * 100
Net Margin percentage = 12.30%

Last Year:
Net Margin percentage = 397,600 / 5,850,000 * 100
Net Margin percentage = 8.18%

Part c.

Return on Total Assets = Net Income / Average Total Assets

This Year:
Average Total Assets = (3,995,600 + 2,988,000) / 2
Average Total Assets = $3,491,800

Return on Total Assets = 719,600 / 3,491,800
Return on Total Assets = 20.61%

Last Year:
Average Total Assets = (2,988,000 + 2,948,000) / 2
Average Total Assets = $2,968,000

Return on Total Assets = 397,600 / 2,968,000
Return on Total Assets = 13.40%

Part d.

Return on Equity = Net Income / Average Stockholders’ Equity

This Year:
Average Stockholders’ Equity = (2,360,600 + 1,768,000) / 2
Average Stockholders’ Equity = $2,064,300

Return on Equity = 719,600 / 2,064,300
Return on Equity = 30.86%

Last Year:
Average Stockholders’ Equity = (1,768,000 + 1,758,000) / 2
Average Stockholders’ Equity = $1,763,000

Return on Equity = 397,600 / 1,763,000
Return on Equity = 22.55%

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