PROBLEM 131 eXcel Preparing Common-Size Statements and Financial Ratios for Creditors [LO1 - CC1; LO2 CC3,4] CHECK FGURES (1e) Inventory turnover this year: 5.0 times (19) Times interest earned last year: 4.9 times Paul Sabin organized Sabin Electronics 10 years ago in order 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 requestin! a $500,000 long-term loan from Gulfport Bank, $100,000 of which will be used to bolster the cash account and $400,000 of which will be used to modernize certain key items of equipment. The company's financial statements for the two most recent years follow: SABIN ELECTRONICS Comparative Balance Sheet Assets Current assets: Cash Marketable securities Accounts recelvable, net Inventory Prepaid expenses Total current assets Plant and equipment, net Total assets $70,000 18,000 480,000300,000 950,000600,000 20,000 1,520,000 1.480,000 $150,000 22,000 1,090,000 1,370,000 $2,460.000 Liabilities and Shareholders' Equity Liabilities: Current llabillities Bonds payable, 12% Total liabilities Shareholders' equity. Preferred shares, no par ($6;20,000 shares issued) Common shares, no par (unlimited authorized, 50,000 issued) Retained earnings Total shareholders' equity Total liabilities and shareholders' equity \begin{tabular}{rr} 250,000 & 250,000 \\ 500,000 & 500,000 \\ 850,000 & 680,000 \\ 1,600,000 & 1,430,000 \\ $3,000,000 & $2.460.000 \\ \hline \end{tabular} SABIN ELECTRONICS Comparalive Income Statement Sales Less: Cost of goods sold Gross margin Less: Operating expenses Net operating income Less: Interest expense Net income before taxes Less: Income taxes (30\%) Net income Dividends paid: Preferred dividends Common dividends 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 that the following ratios are typical of firms in the electronics industry: Current ratio Acid-test (quick) ratio Average age of recelvables Inventory turnover in days Debt-to-equity ratio Times interest earned Return on total assets Price-earnings ratio 2.5 to 1 1.3 to 1 18 days 60 days 0.90 to 1 6.0 times 13% 12 Required: 1. To assist the Gulfport Bank in making a decision about the loan, compute the following ratios for both this year and last year: a. The amount of working capital b. The current ratio. c. The acid-test (quick) ratio. d. The average age of receivables (the accounts receivable at the beginning of last year totalled $250,000 ). e. The inventory turnover in days (the inventory at the beginning of last year totalled $500,000 ). f. The debt-to-equity ratio. g. The times interest eamed. 2. For both this year and last year. a. Present the balance sheet in common-size format. b. Present the income statement in common-size format down through net income. 3. Comment on the results of your analysis in parts (1) and (2) above and recommend whether or not the loan should be approved. Refer to the financial statements and other data in Problem 13-1. 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' shares. You are not acquainted with the company and for this reason wish to do certain analytical work before making a recommendation. Required: 1. You decide first to assess the well-being of the common shareholders. For both this year and last year, compute the following: a. The earnings per share. There has been no change in preferred or common shares over the last two years. b. The dividend yield ratio for common shares. The company's shares are currently selling for $40 per share; last year, they sold for $36 per share. c. The dividend payout ratio for common shares. d. The price-earnings ratio. How do investors regard Sabin Electronics as compared with other firms in the industry? Explain. e. The book value per share of common shares. Does the difference between market value and book value suggest that the shares are overpriced? Explain. 1. You decide first to assess the well-being of the common shareholders. For both this year and last year, compute the following: a. The earnings per share. There has been no change in preferred or common shares over the last two years. b. The dividend yield ratio for common shares. The company's shares are currently selling for $40 per share; last year, they sold for $36 per share. c. The dividend payout ratio for common shares. d. The price-eamings ratio. How do investors regard Sabin Electronics as compared with other firms in the industry? Explain. e. The book value per share of common shares. Does the difference between market value and book value suggest that the shares are 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 equity. (Shareholders' equity at the beginning of last year was $1,329,000.) c. The financial leverage. Is it positive or negative? Explain. 3. Would you recommend that your client purchase Sabin Electronics shares? Explain