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 $520,000 long-term loan from Gulfport State Bank, $110,000 of which will be used to bolster the Cash account and $410,000 of which will be used to modernize equipment. The companys financial statements for the two most recent years follow:

Sabin Electronics

Comparative Balance Sheet

This Year

Last Year

Assets

Current assets:

Cash

$

78,000

$

170,000

Marketable securities

0

20,000

Accounts receivable, net

503,000

320,000

Inventory

965,000

615,000

Prepaid expenses

22,000

24,000

Total current assets

1,568,000

1,149,000

Plant and equipment, net

1,503,800

1,350,000

Total assets

$

3,071,800

$

2,499,000

Liabilities and Stockholders Equity

Liabilities:

Current liabilities

$

810,000

$

450,000

Bonds payable, 12%

700,000

700,000

Total liabilities

1,510,000

1,150,000

Stockholders' equity:

Common stock, $20 par

710,000

710,000

Retained earnings

851,800

639,000

Total stockholders equity

1,561,800

1,349,000

Total liabilities and stockholders' equity

$

3,071,800

$

2,499,000

Sabin Electronics

Comparative Income Statement and Reconciliation

This Year

Last Year

Sales

$

5,100,000

$

4,410,000

Cost of goods sold

3,895,000

3,470,000

Gross margin

1,205,000

940,000

Selling and administrative expenses

657,000

552,000

Net operating income

548,000

388,000

Interest expense

84,000

84,000

Net income before taxes

464,000

304,000

Income taxes (30%)

139,200

91,200

Net income

324,800

212,800

Common dividends

112,000

91,000

Net income retained

212,800

121,800

Beginning retained earnings

639,000

517,200

Ending retained earnings

$

851,800

$

639,000

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 $50 per share; last year it sold for $46 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 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 $2,360,000.)

d. The return on equity. (Stockholders equity at the beginning of last year was $1,339,000.)

e. Is the companys financial leverage positive or negative?