Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several
ID: 340910 • 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 $660,000 long-term loan from Gulfport State Bank, $180,000 of which will be used to bolster the Cash account and $480,000 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.
Required:
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 $660,000 long-term loan from Gulfport State Bank, $180,000 of which will be used to bolster the Cash account and $480,000 of which will be used to modernize equipment. The company’s financial statements for the two most recent years follow:
i. The times interest earned ratio. (Round your answers to 1 decimal place.) This Year Last Year Times interest earned ratio The equity multiplier. (The total stockholders' equity at the beginning of last year totaled $1,806,000.) (Round your answers to 2 decimal places.) j. This Year Last Year Equity multiplierExplanation / Answer
Answer:
1
Times interest earned ration
This
year
Last
year
Times interest earned ratio
12
7.11
Working notes for the above answer:
Times interest earned ratio
=Earning nefore interest expanses and income tax /Interest expanses
For this year
=1080,000/90,000
=12
For last year
=640,000/90,000
=7.11
______________________________
2
This
year
Last
year
Equity multiplier
1.91
1.67
Working notes for the above answer:
Equity multiplier
=total Assets / Average total stock holderEquity
For this year
=4013,000/ (2383000+1816000)/2
=4013000/2099500
=1.91
For last year
=3026000 / (1816000+1806000)/2
=3026000/1811000
=1.67.
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3
Sabin Electronics
Common size Balance Sheet
This Year
Last Year
Assets
Current assets:
Cash
128,000
3.19%
310,000
10.24%
Marketable securities
0
13000
0.43%
Accounts receivable, net
685,000
17.07%
460,000
15.20%
Inventory
1,105,000
27.54%
755,000
24.95%
Prepaid expenses
34,000
0.85%
38000
1.26%
Total current assets
1,952,000
48.64%
1,576,000
52.08%
Plant and equipment, net
2,061,000
51.36%
1,450,000
47.92%
Total assets
4,013,000
100.00%
3026000
100.00%
Liabilities and Stockholders Equity
Liabilities:
Current liabilities
880,000
21.93%
460,000
15.20%
Bonds payable, 12%
750,000
18.69%
750,000
24.79%
Total liabilities
1,630,000
40.62%
1,210,000
39.99%
Stockholders' equity:
Common stock, $15 par
750,000
18.69%
750,000
24.79%
Retained earnings
1,633,000
40.69%
1,066,000
35.23%
Total stockholders’ equity
2,383,000
59.38%
1816000
60.01%
Total liabilities and equity
4,013,000
100.00%
3,026,000
100.00%
__________________________________________
Sabin Electronics
Common Income Statement and Reconciliation
This year
Last year
Sales
5,800,000
100.0%
4,830,000
100.0%
Cost of goods sold
4,035,000
69.6%
3,610,000
74.7%
Gross margin
1,765,000
30.4%
1,220,000
25.3%
Selling and administrative expenses
685,000
11.8%
580,000
12.0%
Net operating income
1,080,000
18.6%
640,000
13.3%
Interest expense
90,000
1.6%
90,000
1.9%
Net income before taxes
990,000
17.1%
550,000
11.4%
Income taxes (30%)
297,000
5.1%
165000
3.4%
0.0%
Net income
693,000
11.9%
385,000
8.0%
Common dividends
126,000
2.2%
105000
2.2%
Net income retained
567,000
9.8%
280,000
5.8%
Beginning retained earnings
1,066,000
18.4%
786000
16.3%
Ending retained earnings
1,633,000
28.2%
1066000
22.1%
This
year
Last
year
Times interest earned ratio
12
7.11