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 $540,000 long-term loan from Gulfport State Bank, $120,000 of which will be used to bolster the Cash account and $420,000 of which will be used to modernize equipment. The companys financial statements for the two most recent years follow:

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

c. The return on total assets. (Total assets at the beginning of last year were $2,420,000.)

d. The return on equity. (Stockholders equity at the beginning of last year was $1,343,000.)

e. Is the companys financial leverage positive or negative?

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 $ 86,000 0 529,000 960,000 22,000 1,597,000 1,631,600 $ 3,228,600 $ 190,000 22,000 340,000 635,000 26,000 1,213,000 1,410,000 $ 2,623,000 Total assets $ 820,000 800,000 1,620,000 $ 470,000 800,000 1,270,000 Liabilities and Stockholders Equity Liabilities: Current liabilities Bonds payable, 12% Total liabilities Stockholders' equity: Common stock, $20 par Retained earnings Total stockholders' equity Total liabilities and stockholders' equity 730,000 878,600 1,608,600 $ 3,228,600 730,000 623,000 1,353,000 $ 2,623,000 Sabin Electronics Comparative Income Statement and Reconciliation This Year Last Year Sales $ 5,200,000 $ 4,470,000 Cost of goods sold 3,915,000 3,490,000 Gross margin 1,285,000 980,000 Selling and administrative expenses 661,000 556,000 Net operating income 624,000 424,000 Interest expense 96,000 96,000 Net income before taxes 528,000 328,000 Income taxes (30%) 158,400 98,400 Net income 369,600 229,600 Common dividends 114,000 93,000 Net income retained 255,600 136,600 Beginning retained earnings 623,000 486,400 Ending retained earnings $ 878,600 $ 623,000 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