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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
Paul Sabin organized Sabin Electronics 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 $ longterm loan from Gulfport State Bank, $ of which will be used to bolster the Cash account and $ 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 $ $
Marketable securities
Accounts receivable, net
Inventory
Prepaid expenses
Total current assets
Plant and equipment, net
Total assets $ $
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities $ $
Bonds payable,
Total liabilities
Stockholders' equity:
Common stock, $ par
Retained earnings
Total stockholders equity
Total liabilities and stockholders' equity $ $
Sabin Electronics
Comparative Income Statement and Reconciliation
This Year Last Year
Sales $ $
Cost of goods sold
Gross margin
Selling and administrative expenses
Net operating income
Interest expense
Net income before taxes
Income taxes
Net income
Common dividends
Net income retained
Beginning retained earnings
Ending retained earnings $ $
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 n All sales are on account.
Required:
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 acidtest ratio.
d The average collection period. The accounts receivable at the beginning of last year totaled $
e The average sale period. The inventory at the beginning of last year totaled $
f The operating cycle.
g The total asset turnover. The total assets at the beginning of last year were $
h The debttoequity ratio.
i The times interest earned ratio.
j The equity multiplier. The total stockholders equity at the beginning of last year totaled $
For both this year and last year:
a Present the balance sheet in commonsize format for both this year and last year.
b Present the income statement in commonsize 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 decimal place and other answers to decimal places.
a The times interest earned ratio.
b The debttoequity ratio.
c The gross margin percentage.
d The return on total assets. Total assets at the beginning of last year were $
e The return on equity. Stockholders equity at the beginning of last year totaled $ 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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