PART 3

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 $570,000 long-term loan from Gulfport State Bank, $135,000 of which will be used to bolster the Cash account and $435,000 of which will be used to modernize equipment. The company’s financial statements for the two most recent years follow:

Sabin Electronics
Comparative Balance Sheet
	This Year		Last Year
Assets
Current assets:
Cash	$	98,000	$	220,000
Marketable securities		0		25,000
Accounts receivable, net		568,000		370,000
Inventory		1,015,000		665,000
Prepaid expenses		26,000		29,000
Total current assets		1,707,000		1,309,000
Plant and equipment, net		1,686,200		1,400,000
Total assets	$	3,393,200	$	2,709,000
Liabilities and Stockholders Equity
Liabilities:
Current liabilities	$	835,000	$	500,000
Bonds payable, 12%		600,000		600,000
Total liabilities		1,435,000		1,100,000
Stockholders' equity:
Common stock, $15 par		760,000		760,000
Retained earnings		1,198,200		849,000
Total stockholders’ equity		1,958,200		1,609,000
Total liabilities and equity	$	3,393,200	$	2,709,000

Sabin Electronics
Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales	$	5,350,000	$	4,560,000
Cost of goods sold		3,945,000		3,520,000
Gross margin		1,405,000		1,040,000
Selling and administrative expenses		667,000		562,000
Net operating income		738,000		478,000
Interest expense		72,000		72,000
Net income before taxes		666,000		406,000
Income taxes (30%)		199,800		121,800
Net income		466,200		284,200
Common dividends		117,000		96,000
Net income retained		349,200		188,200
Beginning retained earnings		849,000		660,800
Ending retained earnings	$	1,198,200	$	849,000

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 3/10, n/30. All sales are on account.

Required:

1.	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:

i.	The times interest earned ratio. (Round your answers to 1 decimal place.)

j.	The equity multiplier. (The total stockholders’ equity at the beginning of last year totaled $1,599,000.) (Round your answers to 2 decimal places.)

2.	For both this year and last year:

a.	Present the balance sheet in common-size format. (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

b.	Present the income statement in common-size format down through net income. (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

Answer rating: 100% (QA)

To assess the stock market performance and profitability of Sabin Electronics lets calculate the requested financial ratios for both the current year ... View the full answer