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 the following ratios are typical of companies in the electronics industry:

Required:

1. To assist the Gulfport State Bank in making a decision about the loan, compute the following ratios for both this year and last year:

a) The amount of working capital.

b) The current ratio.

c) The acid-test ratio.

d) The average collection period. (The accounts receivable at the beginning of last year totaled $250,000.)

e) The average sale period. (The inventory at the beginning of last year totaled $500,000.)

f) The debt-to-equity ratio.

g) The times interest earned ratio.

2. For both this year and last year:

a) Present the balance sheet in common-size format.

b) Present the income statement in common-size format down through net income.

3. Comment on the results of your analysis in (1) and (2) above and make a recommendation as to whether or not the loan should be approved.

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Sabin Electronics Comparative Balance Sheet Assets This year Last year Current assets: S 70,000 S 150,000 Cash Marketable securities 18,000 Accounts receivable, net 480,000 300,000 600,000 Inventory Prepaid expenses Total current assets 950,000 20,000 22,000 1,520,000 1,090,000 Plant and equipment, net 1,480,000 1,370,000 Total assets $3.000,000 $2.460,000 Liabilities and Stockholders' Equity Liabilities: $ 800,000 $ 430,000 Current liabilities 600,000 1,400,000 Bonds payable, 12% 600,000 1,030,000 Total liabilities Stockholders' equity: Preferred stock, $25 par, 8% Common stock, $10 par Retained eamings Total stockholders' equity Total liabilities and equity 250,000 500,000 250,000 500,000 850,000 680,000 1,600,000 1,430,000 $3,000,000 $2.460,000