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 $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: Sabin Electronics Comparative Balance Sheet This Year Last Year 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% $ 104,000 0 594,000 1,035,000 26,000 1,759,000 1,751,000 $ 3,510,000 $ 240,000 27,000 390,000 685,000 31,000 1,373,000 1,420,000 $ 2,793,000 $ $ 845,000 700,000 1,545,000 520,000 700,000 1,220,000 Stockholders' equity: Common stock, $15 par Retained earnings Total stockholders' equity Total liabilities and stockholders' equity 780,000 1,185,000 1,965,000 $ 3,510,000 780,000 793,000 1,573,000 $ 2,793,000
Additional information from part 1:

Please complete "Required 2" and please make the answer clear.

Answer 1

Ans. A	Gross margin percentage   = Gross margin / Net sales * 100
	This year	$1,485,000 / $5,450,000 * 100	27.2%
	Last year	$1,080,000 / $4,620,000 * 100	23.4%
Ans. B	Net profit margin percentage   = Net income / Net sales * 100
	This year	$511,000 / $5,450,000 * 100	9.4%
	Last year	$301,000 / $4,620,000 * 100	6.5%
Ans. C	Return on total assets =   Net income / Average assets * 100
	This year	$511,000 / $3,151,500 * 100	16.2%
	Last year	$301,000 / $2,681,500 * 100	11.2%
	*Average assets = (Beginning assets + Ending assets) / 2
	This year	($2,793,000 + $3,510,000) / 2	$3,151,500
	Last year	($2,570,000 + $2,793,000) / 2	$2,681,500
Ans. D	Return on total equity =   Net income / Average equity * 100
	This year	$511,000 / $1,769,000 * 100	28.9%
	Last year	$301,000 / $1,568,000 * 100	19.2%
	*Average equity = (Beginning equity + Ending equity) / 2
	This year	($1,573,000 + $1,965,000) / 2	$1,769,000
	Last year	($1,563,000 + $1,573,000) / 2	$1,568,000
Ans. E	This year	Positive
	Last year	Positive
	Explanations: The return on equity is greater than the return on assets, so the
	financial leverage is positive in both years.
	Return on equity > Return on assets = Positive financial leverage
	Return on equity < Return on assets = Negative financial leverage