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 $510,000 long-term loan from Gulfport State Bank, $105,000 of which will be used to bolster the Cash account and $405,000 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 $ 74,000 O 490,000 955,000 23,000 1,542,000 1,376, 400 $ 2,918,400 $ 160,000 19,000 310,000 605,000 23,000 1,117,000 1,300,000 $ 2,417,000 Assets Current assets: Cash Marketable securities Accounts receivable, net Inventory Prepaid expenses Total current assets Plant and equipment, net Total assets Liabilities and Stockholders Equity Liabilities: Current liabilities Bonds payable, 12% Total liabilities Stockholders' equity: Common stock, $20 par Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ $ 750,000 650,000 1,400,000 440,000 650,000 1,090,000 700,000 818, 400 1,518,400 $ 2,918,400 700,000 627,000 1,327,000 $ 2,417,000

Answer 1

Solution: (A) Earning Per share Current Previous Year Year Earning Per share = (302400-) / (204400-0)|(700000 420) - (Net Income - Dividend (700000*20) = 204400/35000 on Preferred stocks) Numbey = 302400/35000 = 5.84 . of outstanding wmmon = 8.64 shares = (115000 -- 35000)/50 X100 (90000-35000) 46 x100 @ Dividend Yeeld Ratio = Dividend per share! Current market Per Share X 100 = 6.3% = 5.6 # Nole: Number of common share outstanding = $ 700000 $ 20 → 35000 Shares 3 Dividend Payout Ratio 3 Dividend per share) = (1/1000 - 35000)/ Earning per share 8.64 X100 x 100 = 3.17/6.64 x 100 |(30000-35000) I 5.84 Kloo = 2.57/5.84 Xloo = 44.04. 36.7%

Poice earning - Ratios - Market value per share. Earning fer share 50) 8.64 5.79 46/5.84 = = 7.88 The book value per share of common stock:- This Year Last Year - Net Assets Number = 2018400 of outstanding common = (2918400- 1400000 (2417000-1090000 shares 35000 35000 = 1518 400 35000 = 132700035000 = 43.38 = 37.9) * Net Asset = Total Asset - Total liabilities @ (B) Gross Margin percentage This year I Last Year - Gross Margin / Sales - (1165000/5050000) 1920000|438ddd! X100 = 23.1. - 21.00% X100 Xloo o Net Profit margin Percentage in This year Last Year (302400|5050000) |(2044001 oooc X100 5.9% = 4.60). Net profit, Sales X100 X100

(D) The Return on Last Year - Net Income / Average Total Assets This Year #302400/(2417000+ |204400/(233000 2918400) XIOO 2417000/2100 = 302400|266770071001=(204400 337350 11:3) Total Aseet Xloo X100 - 8.6 e) The Return on Equity This year I Last Year F1 (Net Income Shareholdere B02400/(1327000+ (204400 11317000+ Equity) x100 1518400)|p]X100 1321009)/2]X100 = 302400|1422700), 204400 X 1322000) 10 | = 21.34. - 15.5% f) Is the company negative ? financial leverage positive or . Degree of financial leverage = " % of changes in Earning Per Share 7 of change in net income ** 47.94 47.94

The as company degree financial leverage is positive, of financial leverage is de o 7. of change in earning Per share = (Earning Per share in in Last Year) this year - Earning Per share Earning per share last year X100 8.64 -5.84] 5.84 x 100 15.84 XIDO - 47.94% t. of chang in ** net Income =(Net Income this Year Net income Net Income last Year X100 Last Year) = = (302.400-204400) 204400 x 100 98000/204400 KIDO 47.94%