Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several
ID: 2581846 • 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 $650,000 long-term loan from Gulfport State Bank, $175,000 of which will be used to bolster the Cash account and $475,000 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: $300,0e0 12,000 450,000 745,000 37,000 1,544,000 1,520,00e $ 3,064,000 $ 130,000 Cash Marketable securities Accounts receivable, net Inventory Prepaid expenses 672,000 1,095,000 34,000 1,931,000 2,999 40e $4,030,400 Total current assets Plant and equipment, net Total assets Liabilities and Stockholders Equity Liabilities Current liabilities Bonds payable, 12% $ 875,000 750,00e 1,625,000 $450,000 750,080 1,200,0e0 Total liabilities Stockholders' equity: Common stock, $15 par Retained earnings Total stockholders equity Total liabilities and equity 840,000 1,565,400 2,405,400 $4,030,400 840,000 1,024,000 1,864,000 $ 3,964,000Explanation / Answer
Answer
Part 1
(a) Earning Per Share (EPS):
Particular
This Year
Last Year
a. Common Stock
840000
840000
b. Price Per Share
15
15
c. No. Of Shares (a/b)
56000
56000
d. income after tax
666400
372400
Earning Per Share(d/c)
11.9
6.65
(b) Dividend Yield Ratio
Formula- Dividend per share/price per share
Particular
This Year
Last Year
a. Common Dividend
125000
104000
b. No. of shares
56000
56000
c. Dividend per share (a/b)
2.23
1.86
d. Price per share
50
45
e. Dividend yield (c/d)*100
4.46%
4.13%
(c) Dividend Payout Ratio:
Formula- Common Dividend/Earning After tax
Particular
This Year
Last Year
a. Earning after tax
666400
372400
b. Common Dividend
125000
104000
c. Dividend Payout (b/a)*100
18.76%
27.93%
(d) Price Earning Ratio(PE):
Formula = Price per share/earning per share
Particular
This Year
Last Year
a. Price per share
50
45
b. Earning per share(as calculated in part (a))
11.9
6.65
c. PE ratio (a/b)
4.2 times
6.77 times
E. Book value per share
Formula= Equity fund/no. of shares
Particular
This Year
Last Year
a. Total shareholders equity(given)
2405400
1864000
b. Number of shares
56000
56000
c. Book value (a/b)
42.95 per share
33.29 per share
Part 2
A. Gross Margin precentage
Formula: (Gross margin/sales)*100
Particular
This Year
Last Year
a. Gross margin
1725000
1200000
b. Sales
5750000
4800000
c. Gross Margin percentage(a/b)*100
30%
25%
B. Net Profit margin precentage
Formula= (net profit/sales)*100
Particular
This Year
Last Year
a. Net income
666400
372400
b. Sales
5750000
4800000
c. Net Profit margin percentage (a/b)*100
11.59%
7.76%
C. Return on total asset
Formula= (net income/Total average Asset)*100
Here we need to use average asset for the year
Therefor:
previous year average asset is = 3024000+3064000/2=3044000
This year’s average asset is = 3064000+4030000/2=3547200
Particular
This Year
Last Year
a. Total average asset
3547200
3044000
b. net income
666400
372400
c. Return on asset (b/a)*100
18.79%
12.23%
Note: we used average asset here. We can also use net asset, in that case answer will be different
D. Return On equity
Formula: Net Income/Average Equity
Average equity for last year= 1854000+1864000/2=1859000
Avg equity for this year=1864000+2405400/2=2134700
Particular
This Year
Last Year
a. Average equity
2134700
1859000
b. Net Income
666400
372400
c. ROE (b/a)*100
31.22%
20%
E. Financial Leverage
Formula=Earning before interest and tax/ Earning before tax
Particular
This Year
Last Year
a. EBIT (Net Operating Income)
1042000
622000
b. net income before tax
952000
532000
c. Fin. Leverage (a/b)
1.0945 times
1.1691 times
Financial leverage of firm is positive
Thanks.
Particular
This Year
Last Year
a. Common Stock
840000
840000
b. Price Per Share
15
15
c. No. Of Shares (a/b)
56000
56000
d. income after tax
666400
372400
Earning Per Share(d/c)
11.9
6.65