Homework SoursePaul Sabin organized Sabin Electronics 10 years ago to produ
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.
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).)
| Sabin Electronics | ||||
| Comparative Balance Sheet | ||||
| This Year | Last Year | |||
| Assets | ||||
| Current assets: | ||||
| Cash | $ | 104,000 | $ | 240,000 |
| Marketable securities | 0 | 27,000 | ||
| Accounts receivable, net | 594,000 | 390,000 | ||
| Inventory | 1,035,000 | 685,000 | ||
| Prepaid expenses | 26,000 | 31,000 | ||
| Total current assets | 1,759,000 | 1,373,000 | ||
| Plant and equipment, net | 1,751,000 | 1,420,000 | ||
| Total assets | $ | 3,510,000 | $ | 2,793,000 |
| Liabilities and Stockholders Equity | ||||
| Liabilities: | ||||
| Current liabilities | $ | 845,000 | $ | 520,000 |
| Bonds payable, 12% | 700,000 | 700,000 | ||
| Total liabilities | 1,545,000 | 1,220,000 | ||
| Stockholders\' equity: | ||||
| Common stock, $15 par | 780,000 | 780,000 | ||
| Retained earnings | 1,185,000 | 793,000 | ||
| Total stockholders’ equity | 1,965,000 | 1,573,000 | ||
| Total liabilities and equity | $ | 3,510,000 | $ | 2,793,000 |
Solution
1.
2.
| Ratio | formula | This year | Last year |
| a. EPS | Net Income/No. of shares | 511000/52000 = $9.83 | 301000/52000 = $5.79 |
| b. dividend yield ratio | dividend/share price | 2.29/60 = 3.82% | 1.88/55 = 3.42% |
| c. dividend payout ratio | dividend / Net Income | 119000/511000 = 0.23 | 98000/301000 = 0.33 |
| d. price-earning ratio | Market price/earning per share | 60/9.83 = 6.10 | 55/5.79 = 9.50 |
| e. book-value per share | Shareholder\'s equity / No. of shares | 1965000/52000 = $37.79 | 1573000/52000 = $30.25 |
