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 $$570,000$ long$-$term loan from Gulfport State Bank, $$135,000$ of which will be used to bolster the Cash account and $$435,000$ of which will be used to modernize equipment. The company$$s financial statements for the two most recent years follow:

Sabin Electronics

Comparative Balance Sheet

This Year Last Year

Assets

Current assets:

Cash $ $98,000$ $ $220,000$

Marketable securities $025,000$

Accounts receivable, net $568,000370,000$

Inventory $1,015,000665,000$

Prepaid expenses $26,00029,000$

Total current assets $1,707,0001,309,000$

Plant and equipment, net $1,686,2001,400,000$

Total assets $ $3,393,200$ $ $2,709,000$

Liabilities and Stockholders' Equity

Liabilities:

Current liabilities $ $835,000$ $ $500,000$

Bonds payable, $12\%600,000600,000$

Total liabilities $1,435,0001,100,000$

Stockholders' equity:

Common stock, $$15$ par $760,000760,000$

Retained earnings $1,198,200849,000$

Total stockholders$$ equity $1,958,2001,609,000$

Total liabilities and stockholders' equity $ $3,393,200$ $ $2,709,000$

Sabin Electronics

Comparative Income Statement and Reconciliation

This Year Last Year

Sales $ $5,350,000$ $ $4,560,000$

Cost of goods sold $3,945,0003,520,000$

Gross margin $1,405,0001,040,000$

Selling and administrative expenses $667,000562,000$

Net operating income $738,000478,000$

Interest expense $72,00072,000$

Net income before taxes $666,000406,000$

Income taxes $(30\%)199,800121,800$

Net income $466,200284,200$

Common dividends $117,00096,000$

Net income retained $349,200188,200$

Beginning retained earnings $849,000660,800$

Ending retained earnings $ $1,198,200$ $ $849,000$

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 $3/10,$ n$/30.$ All sales are on account.

Required:

$1.$ To assist in approaching the bank about the loan, Paul has asked you to 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 $$320,000.)$

e$.$ The average sale period. $($The inventory at the beginning of last year totaled $$570,000.)$

f$.$ The operating cycle.

g$.$ The total asset turnover. $($The total assets at the beginning of last year were $$2,630,000.)$

h$.$ The debt$-$to$-$equity ratio.

i$.$ The times interest earned ratio.

j$.$ The equity multiplier. $($The total stockholders$$ equity at the beginning of last year totaled $$1,599,000.)$

$2.$ For both this year and last year:

a$.$ Present the balance sheet in common$-$size format for both this year and last year.

b$.$ Present the income statement in common$-$size format down through net income for both this year and last year.Required:

You decide first to assess the company's performance in terms of debt management and profitability. Compute the following for both

this year and last year: $($Round your "Percentage" answers to $1$ decimal place and other answers to $2$ decimal places.$)$

a$.$ The times interest earned ratio.

b$.$ The debt$-$to$-$equity ratio.

c$.$ The gross margin percentage.

d$.$ The return on total assets. $($Total assets at the beginning of last year were $$12,970,000.)$

e$.$ The return on equity. $($Stockholders$\text{'}$ equity at the beginning of last year totaled $$7,701,650.$ There has been no change in common

stock over the last two years.$)$

f$.$ Is the company's financial leverage positive or negative?