Question
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
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 sever 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 equipment. The companys financial statements for the two recent years follow:
Sabin Electronics | ||
Comparative Balance Sheet | ||
This Year | Last Year | |
Assets | ||
Current Assets: | ||
Cash | 70,000 | 150,000 |
Marketable Securities | 0 | 18,000 |
Accounts Receivable, Net | 480,000 | 300,000 |
Inventory | 950,000 | 600,000 |
Prepaid Expenses | 20,000 | 22,000 |
Total Current Assets | 1,520,000 | 1,090,000 |
Plant and Equipment, Net | 1,480,000 | 1,370,000 |
Total Assets | 3,000,000 | 2,460,000 |
Liabilities and Stockholders Equity | ||
Liabilities: | ||
Current Liabilities | 800,000 | 430,000 |
Bonds Payable, 12% | 600,000 | 600,000 |
Total Liabilities | 1,400,000 | 1,030,000 |
Stockholder's Equity | ||
Common Stock, $15 Par | 750,000 | 750,000 |
Retained Earnings | 850,000 | 680,000 |
Total Stockholder's Equity | 1,600,000 | 1,430,000 |
Total Liabilities and Stockholder's Equity | 3,000,000 | 2,460,000 |
Sabin Electronics | ||
Comparative Income Statement | ||
This Year | Last Year | |
Sales | 5,000,000 | 4,350,000 |
Cost of Goods Sold | 3,875,000 | 3,450,000 |
Gross Margin | 1,125,000 | 900,000 |
Selling and Administrative Expenses | 653,000 | 548,000 |
Net Operating Income | 472,000 | 352,000 |
Interest Expense | 72,000 | 72,000 |
Net Income Before Taxes | 400,000 | 270,000 |
Income Taxes (30%) | 120,000 | 84,000 |
Net Income Before Taxes | 280,000 | 196,000 |
Common Dividends | 110,000 | 95,000 |
Net Income Retained | 170,000 | 101,000 |
Beginning Retained Earnings | 680,000 | 579,000 |
Ending Retained Earnings | 850,000 | 680,000 |
During the past year, the company introduced several new product lines and raised the selling price 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 into several new territories. Sales terms are 2/10, n/30. All sales are on account.
- 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.
- The amount of working capital
- The current ratio
- The acid-test ratio
- The average collection period (The accounts receivable at the beginning of last year totaled $250,000)
- The average sales period (The inventory at the beginning of last year totaled $500,000)
- The operating cycle
- The total asset turnover. (The total assets at the beginning of last year were $2,420,000)
- The debt-to-equity ratio
- The times interest earned ratio
- The equity multiplier (The total stockholders equity at the beginning of last year totaled $1,420,000)
2. For both this year and last year
A. Present the balance sheet in common-size format
B. Present the income statement in common-size format down through net income
3. Paul Sabin has also gathered the following financial data and ratios that are typical of companies in the electronics industry:
Current Ratio 2.5
Acid-Test Ratio 1.3
Average Collection period 18 Days
Average Sales Period 60 Days
Debt-to-Equity Ratio 0.90
Times Interest Earned Ratio 6.0
Comment on the results of your analysis (1) and (2) above and compare Sabin Electronics performance to the benchmarks from the electronics industry. Do you think that the company is likely to get its loan application approved?
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