1 Paul Sabin organized Sabin Electronics 10 years ago in order 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 certain key items of equipment. The company's financial statements for the two most recent years follow: 10 points SABIN ELECTRONICS Comparative Balance Sheet eBook This Year Last Year Print References $ 54,800 383,000 767,000 16, 200 1,221,000 1,000,000 $2,221,000 $ 88,000 10,400 176,000 352,000 13,000 639,400 810, 600 $ 1,450,000 Assets Current assets: Cash Marketable securities Accounts receivable, net Inventory Prepaid expenses Total current assets Plant and equipment, net Total assets Liabilities and Shareholders' Equity Liabilities: Current liabilities Bonds payable, 12% Total liabilities Shareholders' equity: Preferred shares, no par ($6; 15,760 shares issued) Common shares, no par (unlimited authorized, 20,000 issued) Retained earnings Total shareholders' equity Total liabilities and shareholders' equity $ $ 636,000 300,000 936,000 481,000 300,000 781,000 197,000 200,000 888,000 1,285,000 $2,221,000 197,000 200,000 272,000 669,000 $ 1,450,000 1 10 points SABIN ELECTRONICS Comparative Income Statement This Year Sales $ 4,000,000 Less: Cost of goods sold 3,075,000 Gross margin 925,000 Less: Operating expenses 520,000 Net operating income 405,000 Less: Interest expense 36,000 Net income before taxes 369,000 Less: Income taxes (30%) 110,700 Net income 258,300 Dividends paid: Preferred dividends 20,000 Common dividends 72,000 Total dividends paid 92,000 Net income retained 166,300 Retained earnings, beginning of year 550,000 Retained earnings, end of year $ 716,300 Last Year $ 3,550,000 2,800,000 750,000 445,000 305,000 36,000 269,000 80,700 188,300 eBook Print References 20,000 61,000 81,000 107,300 442,700 550,000 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 firms in the electronics industry: Current ratio Acid-test (quick) ratio Average age of receivables Inventory turnover in days Debt-to-equity ratio Times interest earned Return on total assets Price-earnings ratio 2.5 to 1 1.3 to 1 18 days 60 days 0.90 to 1 6.0 times 13% 12 1 Debt-to-equity ratio Times interest earned Return on total assets Price-earnings ratio 0.90 to 1 6.0 times 13% 12 10 points Required: 1. To assist the Gulfport Bank in making a decision about the loan, compute the following ratios for both this year and last year (Use 365 days a year. Round your intermediate calculations to 1 decimal place. Round Debt-to-equity ratio to 3 decimal places and other answers to 2 decimal places.): eBook Print References a. The amount of working capital. b. The current ratio. c. The acid-test (quick) ratio. d. The average age of receivables (the accounts receivable at the beginning of last year totalled $174,000). e. The inventory turnover in days (the inventory at the beginning of last year totalled $348,000). f. The debt-to-equity ratio. g. The times interest earned. This Year Last Year 1.92 to 1 to 1 0.69 to 1 to 1 Working capital Current ratio Acid-test ratio Average age of receivables Inventory turnover in days Debt-to-equity ratio Times interest earned 25.63 days 66.85 days to 1 days days to 1 times times 1 2. For both this year and last year: (a) Present the balance sheet in common-size format. (Leave no cells blank - be certain to enter "O" wherever required. Round your answers to 1 decimal place.) 10 points SABIN ELECTRONICS Common-Size Balance Sheets This Year Last Year eBook Current assets: Cash % % Print References Marketable securities Accounts receivable, net Inventory Prepaid expenses Total current assets Plant and equipment, net Total assets 0.0 % 0.0 % Current liabilities % % 0.0 0.0 Bonds payable, 12% Total liabilities Shareholders' equity Preferred shares, no par, $6 Common shares, no par Retained earnings 0.0 Total shareholders' equity Total liabilities and equity 0.0 0.0 % 0.01%