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: Last Year SABIN ELECTRONICS Comparative Balance Sheet This Year Assets Current assets: Cash $ 73,000 Marketable securities Accounts receivable, net 514,600 Inventory 1,033,000 Prepaid expenses 20,400 $ 130,000 16,000 260,000 520,000 18,600 Total current assets Plant and equipment, net 1,641,000 1,240,000 944,600 1,205,400 Total assets $2,881,000 $2,150,000 Liabilities and Shareholders' Equity Liabilities: Current liabilities Bonds payable, 12% $ 860,000 400,000 $ 600,000 400,000 Total liabilities 1,260,000 1,000,000 281,000 281,000 Shareholders' equity: Preferred shares, no par ($6, 22,480 shares issued) Common shares, no par (unlimited authorized, 34,000 issued) Retained earnings 340.000 1,000,000 340,000 529,000 Total shareholders' equity 1,621,000 1,150,000 Total liabilities and shareholders' equity $2,881,000 $2,150,000 SABIN ELECTRONICS Comparative Income Statement This Year Sales $5,400,000 Less: Cost of goods sold 4,139,000 Last Year $4,250,000 3,360,000 Gross margin Less: Operating expenses 1.261.000 702,000 890,000 529,000 Net operating income Less: Interest expense 559.000 48.000 361,000 48,000 Net income before taxes Less: Income taxes (30%) 511,000 153,300 313,000 93,900 Net income 357,700 219,100 Dividends paid: Preferred dividends Common dividends 20,000 97,200 20,000 72,900 Total dividends paid 117,200 92,900 Net income retained Retained earnings, beginning of year 240,500 656,400 126,200 530,200 Retained earnings, end of year $ 896,900 $ 656,400 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 % (b) Present the income statement in common-size format down through net income. (Input all values as positive values. Round your answers to 1 decimal place.) Last Year SABIN ELECTRONICS Common-Size Balance Sheets This Year Sales Less cost of goods sold Gross margin Less operating expenses Net operating income Less interest expense Net income before taxes Less income taxes Net income %
