Taylor Jackson founded Dubbin Electronics 5 years ago to produce and sell electronic devices on which she had secured patent rights. Although the company has been profitable, it is now experiencing a severe cash shortage. For this reason, it is requesting a $560,000 long-term loan from Gulf State Bank, $130,000 of which will be used to bolster the cash account of the company and $430,000 of which will be used to modernize equipment. The companys financial statements for the two most recent years follow:

Dubbin Electronics
Comparative Balance Sheet
	This Year	Last Year
Assets
Current assets:
Cash	$ 94,000	$ 210,000
Marketable securities	0	24,000
Accounts receivable, net	555,000	360,000
Inventory	1,005,000	655,000
Prepaid expenses	26,000	28,000
Total current assets	1,680,000	1,277,000
Plant and equipment, net	1,665,400	1,430,000
Total assets	$ 3,345,400	$ 2,707,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$ 830,000	$ 490,000
Bonds payable, 12%	900,000	900,000
Total liabilities	1,730,000	1,390,000
Stockholders' equity:
Common stock, $ 15 par	750,000	750,000
Retained earnings	865,400	567,000
Total stockholders equity	1,615,400	1,317,000
Total liabilities and stockholders' equity	$ 3,345,400	$ 2,707,000

Dubbin Electronics
Comparative Income Statement and Reconciliation
	This Year	Last Year
Sales	$ 5,300,000	$ 4,530,000
Cost of goods sold	3,935,000	3,510,000
Gross margin	1,365,000	1,020,000
Selling and administrative expenses	665,000	560,000
Net operating income	700,000	460,000
Interest expense	108,000	108,000
Net income before taxes	592,000	352,000
Income taxes (30%)	177,600	105,600
Net income	414,400	246,400
Common dividends	116,000	95,000
Net income retained	298,400	151,400
Beginning retained earnings	567,000	415,600
Ending retained earnings	$ 865,400	$ 567,000

The company introduced some new product lines last year and raised the selling prices on some 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 areas. Sales terms are 2/10, n/30. All sales are on account.

Assume Taylor Jackson has asked you to assess her 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 $45 per share; last year it sold for $40 per share.

c. The dividend payout ratio.

d. The price-earnings ratio. (Assume that the industry norm for the price-earnings ratio is 11)

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 $2,480,000.)

d. The return on equity. (Stockholders equity at the beginning of last year was $1,307,000.)

e. Is the companys financial leverage positive or negative?