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 $690,000 long-term loan from Gulfport State Bank, $195,000 of which will be used to bolster the Cash account and $495,000 of which will be used to modernize equipment. The companys financial statements for the two most recent years follow:

Sabin ElectronicsComparative Balance Sheet This YearLast YearAssets Current assets: Cash$ 146,000$ 340,000Marketable securities016,000Accounts receivable, net724,000490,000Inventory1,135,000785,000Prepaid expenses38,00041,000Total current assets2,043,0001,672,000Plant and equipment, net2,229,4001,480,000Total assets$ 4,272,400$ 3,152,000Liabilities and Stockholders' Equity Liabilities: Current liabilities$ 895,000$ 410,000Bonds payable, 12%850,000850,000Total liabilities1,745,0001,260,000Stockholders' equity: Common stock, $20 par880,000880,000Retained earnings1,647,4001,012,000Total stockholders equity2,527,4001,892,000Total liabilities and stockholders' equity$ 4,272,400$ 3,152,000

Sabin ElectronicsComparative Income Statement and Reconciliation This YearLast YearSales$ 5,950,000$ 4,920,000Cost of goods sold4,065,0003,640,000Gross margin1,885,0001,280,000Selling and administrative expenses691,000586,000Net operating income1,194,000694,000Interest expense102,000102,000Net income before taxes1,092,000592,000Income taxes (30%)327,600177,600Net income764,400414,400Common dividends129,000108,000Net income retained635,400306,400Beginning retained earnings1,012,000705,600Ending retained earnings$ 1,647,400$ 1,012,000

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 companys profitability and stock market performance.

Required:

1. You decide first to assess the companys 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 companys stock is currently selling for $60 per share; last year it sold for $55 per share.

c. The dividend payout ratio.

d. The price-earnings ratio. (Assume that the industry norm for the price-earnings ratio is 8)

e. The book value per share of common stock.

2. You decide next to assess the companys 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 $3,112,000.)

d. The return on equity. (Stockholders equity at the beginning of last year was $1,882,000.)

e. Is the companys financial leverage positive or negative?