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Paul Sabin organized Sabin Electronics 1 0 years ago to produce and sell several electronic devices on which he had secured patents. Although the company

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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 companys 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' 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?
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