Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several
ID: 340524 • 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 $560,000 long-term loan from Gulfport State Bank, $130,000 of which will be used to bolster the Cash account and $430,000 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 2/10, n/30. All sales are on account.
Assume that Paul Sabin has asked you to assess his company’s profitability and stock market performance.
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 $45 per share; last year it sold for $40 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 $2,480,000.) (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 $1,307,000.) (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)
Explanation / Answer
Answer 1-a.
This Year:
Number of shares outstanding = Common Stock / Par Value per share
Number of shares outstanding = $750,000 / $15
Number of shares outstanding = 50,000
Earnings per share = Net Income / Number of shares outstanding
Earnings per share = $414,400 / 50,000
Earnings per share = $8.29
Last Year:
Number of shares outstanding = Common Stock / Par Value per share
Number of shares outstanding = $750,000 / $15
Number of shares outstanding = 50,000
Earnings per share = Net Income / Number of shares outstanding
Earnings per share = $246,400 / 50,000
Earnings per share = $4.93
Answer 1-b.
This Year:
Dividend per share = Common Dividends / Number of shares outstanding
Dividend per share = $116,000 / 50,000
Dividend per share = $2.32
Dividend Yield Ratio = Dividend per share / Current Price per share
Dividend Yield Ratio = $2.32 / $45
Dividend Yield Ratio = 5.16%
Last Year:
Dividend per share = Common Dividends / Number of shares outstanding
Dividend per share = $95,000 / 50,000
Dividend per share = $1.90
Dividend Yield Ratio = Dividend per share / Current Price per share
Dividend Yield Ratio = $1.90 / $40
Dividend Yield Ratio = 4.75%
Answer 1-c.
This Year:
Dividend Payout Ratio = Common Dividend / Net Income
Dividend Payout Ratio = $116,000 / $414,400
Dividend Payout Ratio = 28.0%
Last Year:
Dividend Payout Ratio = Common Dividend / Net Income
Dividend Payout Ratio = $95,000 / $246,400
Dividend Payout Ratio = 38.6%
Answer 1-d.
This Year:
Price-earnings Ratio = Market Price per share / Earnings per share
Price-earnings Ratio = $45 / $8.29
Price-earnings Ratio = 5.43
Last Year:
Price-earnings Ratio = Market Price per share / Earnings per share
Price-earnings Ratio = $40 / $4.93
Price-earnings Ratio = 8.11
Answer 1-e.
This Year:
Book Value per share = Total Stockholders’ Equity / Number of shares outstanding
Book Value per share = $1,615,400 / 50,000
Book Value per share = $32.31
Last Year:
Book Value per share = Total Stockholders’ Equity / Number of shares outstanding
Book Value per share = $1,317,000 / 50,000
Book Value per share = $26.34