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	$	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		960,000		960,000
Retained earnings		1,005,000		613,000
Total stockholders’ equity		1,965,000		1,573,000
Total liabilities and equity	$	3,510,000	$	2,793,000

Sabin Electronics
Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales	$	5,450,000	$	4,620,000
Cost of goods sold		3,965,000		3,540,000
Gross margin		1,485,000		1,080,000
Selling and administrative expenses		671,000		566,000
Net operating income		814,000		514,000
Interest expense		84,000		84,000
Net income before taxes		730,000		430,000
Income taxes (30%)		219,000		129,000
Net income		511,000		301,000
Common dividends		119,000		98,000
Net income retained		392,000		203,000
Beginning retained earnings		613,000		410,000
Ending retained earnings	$	1,005,000	$	613,000
h. The debt-to-equity ratio. (Round your answers to 3 decimal places.)              i. The times interest earned ratio. (Round your answers to 1 decimal place.)            j. The equity multiplier. (The total stockholders’ equity at the beginning of last year totaled $1,563,000.) (Round your answers to 2 decimal places.)    2. For both this year and last year: a. Present the balance sheet in common-size format. (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).) Sabin Electronics Common-Size Balance Sheets This Year Last Year Assets Current assets: Cash % % Marketable securities Accounts receivable, net Inventory Prepaid expenses Total current assets 0.0 0.0 Plant and equipment, net Total assets 0.0 % 0.0 % Liabilities and Stockholders’ Equity Liabilities: Current liabilities % % Bonds payable, 12% Total liabilities 0.0 0.0 Stockholders’ equity: Common stock, $15 par Retained earnings Total stockholders’ equity 0.0 0.0 Total liabilities and equity 0.0 % 0.0 %

b.	Present the income statement in common-size format down through net income. (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

	Sabin Electronics Common-Size Income Statements This Year Last Year Sales % % Cost of goods sold Gross margin 0.0 0.0 Selling and administrative expenses Net operating income 0.0 0.0 Interest expense Net income before taxes 0.0 0.0 Income taxes Net income 0.0 % 0.0 %

Answer 1

Solution 1h:

Debt to Equity ratio = Total liabiities / Total Equity

This Year = $1,545,000 / $1,965,000 = 0.786

Last year = $1,220,000 / $1,573,000 = 0.776

Solution 1i:

Time interest earned ratio = EBIT / Interest =

This year = $814,000 / $84,000 = 9.7 times

Last Year = $514,000 / $84,000 = 6.1 times

Solution 1j:
Equity multiplier = Total Assets / stockholder's equity

This year = $3,510,000 / $1,965,000 = 1.79

Last year = $2,793,000 / $1,573,000 = 1.78

Solution 2:

Sabin Electronics
Common-Size Balance Sheets
	This Year		Last Year
Assets
Current assets:
Cash	$104,000.00	3.0%	$240,000.00	8.6%
Marketable securities	$0.00	0.0%	$27,000.00	1.0%
Accounts receivable, net	$594,000.00	16.9%	$390,000.00	14.0%
Inventory	$1,035,000.00	29.5%	$685,000.00	24.5%
Prepaid expenses	$26,000.00	0.7%	$31,000.00	1.1%
Total current assets	$1,759,000.00	50.1%	$1,373,000.00	49.2%
Plant and equipment, net	$1,751,000.00	49.9%	$1,420,000.00	50.8%
Total assets	$3,510,000.00	100.0%	$2,793,000.00	100.0%
Liabilities and Stockholders’ Equity
Liabilities:
Current liabilities	$845,000.00	24.1%	$520,000.00	18.6%
Bonds payable, 12%	$700,000.00	19.9%	$700,000.00	25.1%
Total liabilities	$1,545,000.00	44.0%	$1,220,000.00	43.7%
Stockholders’ equity:
Common stock, $15 par	$960,000.00	27.4%	$960,000.00	34.4%
Retained earnings	$1,005,000.00	28.6%	$613,000.00	21.9%
Total stockholders’ equity	$1,965,000.00	56.0%	$1,573,000.00	56.3%
Total liabilities and equity	$3,510,000.00	100.0%	$2,793,000.00	100.0%

Solution 3:

Sabin Electronics
Common-Size Income Statements
	This Year		Last Year
Sales	$5,450,000.00	100.0%	$4,620,000.00	100.0%
Cost of goods sold	$3,965,000.00	72.8%	$3,540,000.00	76.6%
Gross margin	$1,485,000.00	27.2%	$1,080,000.00	23.4%
Selling and administrative expenses	$671,000.00	12.3%	$566,000.00	12.3%
Net operating income	$814,000.00	14.9%	$514,000.00	11.1%
Interest expense	$84,000.00	1.5%	$84,000.00	1.8%
Net income before taxes	$730,000.00	13.4%	$430,000.00	9.3%
Income taxes	$219,000.00	4.0%	$129,000.00	2.8%
Net income	$511,000.00	9.4%	$301,000.00	6.5%