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 $500,000 long-term loan from Gulfport State Bank, $100,000 of which will be used to bolster the Cash account and $400,000 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.
The return on total assets. (Total assets at the beginning of last year were $2,300,000.) (Round your percentage answers to 1 decimal place (i.e., 0.123 should be entered as 12.3).)
The return on equity. (Stockholders’ equity at the beginning of last year was $1,329,000.) (Round your percentage answers to 1 decimal place (i.e., 0.123 should be entered as 12.3).)
| 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 $500,000 long-term loan from Gulfport State Bank, $100,000 of which will be used to bolster the Cash account and $400,000 of which will be used to modernize equipment. The company’s financial statements for the two most recent years follow: |
Solution
C. Return on total Assets= EBIT or Net operating Income / Avg Net Assets
472000/(3000000+2460000/2)= 17.29
d. Return on equity= Net Income/ Shareholders Equity
170000/ (1600000+1430000/2) = 11.22
e. Avg Sale period= 365/ Accounts recievable turnover ratio
Accounts recievable turnover ratio= credit sales/ Avg Accounts recievable
5000000/(480000+300000/2)= 12.82
Hence Avg Sale period = 365/12.82 = 28 days
f. operating cycle= Avg Inventory period + Avg Sale period
Avg Inventory period= 365 days/ Inventory turnover ratio
Inventory turnover ratio= Cost of goods sold/ Avg Inventory
3875000/(950000+600000/2) =5
Hence Avg inventory period = 365 days/5 = 73 days
Hence operating cycle= 73 days + 28 days= 101 days
j. Equity multiplier= Total Asset value/ Total Net Equity
3000000/1600000= 1.88
