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 $$670,000$ long$-$term loan from Gulfport State Bank, $$185,000$ of which will be used to bolster the Cash account and $$485,000$ of which will be used to modernize equipment. The company$$s financial statements for the two most recent years follow:

Sabin Electronics

Comparative Balance Sheet

This Year Last Year

Assets

Current assets:

Cash $ $133,000$ $ $320,000$

Marketable securities $014,000$

Accounts receivable, net $698,000470,000$

Inventory $1,115,000765,000$

Prepaid expenses $34,00039,000$

Total current assets $1,980,0001,608,000$

Plant and equipment, net $2,015,6001,380,000$

Total assets $ $3,995,600$ $ $2,988,000$

Liabilities and Stockholders' Equity

Liabilities:

Current liabilities $ $885,000$ $ $470,000$

Bonds payable, $12\%750,000750,000$

Total liabilities $1,635,0001,220,000$

Stockholders' equity:

Common stock, $ $20$ par $860,000860,000$

Retained earnings $1,500,600908,000$

Total stockholders$$ equity $2,360,6001,768,000$

Total liabilities and stockholders' equity $ $3,995,600$ $ $2,988,000$

Sabin Electronics

Comparative Income Statement and Reconciliation

This Year Last Year

Sales $ $5,850,000$ $ $4,860,000$

Cost of goods sold $4,045,0003,620,000$

Gross margin $1,805,0001,240,000$

Selling and administrative expenses $687,000582,000$

Net operating income $1,118,000658,000$

Interest expense $90,00090,000$

Net income before taxes $1,028,000568,000$

Income taxes $(30\%)308,400170,400$

Net income $719,600397,600$

Common dividends $127,000106,000$

Net income retained $592,600291,600$

Beginning retained earnings $908,000616,400$

Ending retained earnings $ $1,500,600$ $ $908,000$

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 Paul Sabin has asked you to assess his company$$s profitability and stock market performance.

Required:

$1.$ You decide first to assess the company$$s stock market performance. For both this year and last year, compute:

a$.$ The earnings per share. There has been no change in common stock over the last two years.

b$.$ The dividend yield ratio. The company$$s stock is currently selling for $$60$ per share; last year it sold for $$50$ per share.

c$.$ The dividend payout ratio.

d$.$ The price$-$earnings ratio. $($Assume that the industry norm for the price$-$earnings ratio is $10)$

e$.$ The book value per share of common stock.

$2.$ You decide next to assess the company$$s profitability. Compute the following for both this year and last year:

a$.$ The gross margin percentage.

b$.$ The net profit margin percentage.

c$.$ The return on total assets. $($Total assets at the beginning of last year were $$2,948,000.)$

d$.$ The return on equity. $($Stockholders$$ equity at the beginning of last year was $$1,758,000.)$

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