Refer to the financial statements and other data in Problem 16—12. Assume that you are an account executive for a large brokerage house and that one of your clients has asked for a recommendation about the possible purchase of Sabin Electronics’ stock. You are not acquainted with the stock and for this reason wish to do some analytical work before making a recommendation.

Required:

1. You decide first to assess the well-being of the common stockholders. For both this year and last year, compute:

a. The earnings per share. There has been no change in preferred or common stock over the last two years.

b. The dividend yield ratio for common stock. The company’s stock is currently selling for $40 per share; last year it sold for $36 per share.

c. The dividend payout ratio for common stock.

d. The price-earnings ratio. How do investors regard Sabin Electronics as compared to other companies in the industry? Explain.

e. The book value per share of common stock. Does the difference between market value and book value suggest that the stock is overpriced? Explain.

2. You decide next to assess the company’s rate of return. Compute the following for both this year and last year:

a. The return on total assets. (Total assets at the beginning of last year were $2,300,000.)

b. The return on common stockholders’ equity. (Stockholders’ equity at the beginning of last year was $1,329,000.)

c. Is the company’s financial leverage positive or negative? Explain.

3. Would you recommend that your client purchase shares of Sabin Electronics’ stock? Explain?