PROBLEM 13-2

Computing Financial Ratios for Common Shareholders [LO2-CC2)

CHECK FIGURES

EPS this year: $5:20

Dividend payout ratio last year 42.6%

Refer to the financial statements and other data in Problem 1-1 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:

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 cover the last two years

The dividend payout ratio for common sharm. The company's shares are currently selling for $40 per share last year, they sold for $36 per share

e. The dividend payout ratio for common shares

a. The price-earnings ratio. How do investors regard Sobin Electronics compared with other firms in the industry? Explain.

The book value per share of common shares Does the difference between market value and hook value suggest that the shares are overpriced. Explain?

overpriced? Explain

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. 257 of 344> SABINEIECTRONICS Comparative Balance Sheet Assets Current assets: Cash Marketable securities Accounts receivable, net Inventory Prepaid expenses Total current assets Plant and equipment, net Total assets Liabilities and Shareholders' Equity Liabilities: Current liabilities \begin{tabular}{lr} $800,000 & $430,000 \\ 600,000 & 600,000 \\ \hline \end{tabular} Bonds payable, 12% Llabilities and Shareholders' Equity Liabilities: Current liabilities 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 $800,000 600,000 1,400,000 250,000 500,000 850,000 1,600,000 $3,000,000 SABINELECTRONICS Comparative Income Statement Dividends paid: Dividends paid: Preferred dividends Common dividends Total dividends paid Net income retained Retained earnings, beginning of year Retained earnings, end of year During the past year, the company introduced several new product lines and raised the selling prices on a number of ol order to improve its profit margin. The company also hired a new sales manager, who has expanded sales into several terms are 2/10,n/30. All sales are on account. Assume that the following ratios are typical of firms in the electronics in 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 2.5 to 1 Acid-test (quick) ratio 1.3 to 1 Average age of receivables 18 days Inventory turnover in days 60 days Debt-to-equity ratio 0.90 to 1 Times interest earned 6.0 times Return on total assets 13% Price-earnings ratio 12 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. 257 of 344> SABINEIECTRONICS Comparative Balance Sheet Assets Current assets: Cash Marketable securities Accounts receivable, net Inventory Prepaid expenses Total current assets Plant and equipment, net Total assets Liabilities and Shareholders' Equity Liabilities: Current liabilities \begin{tabular}{lr} $800,000 & $430,000 \\ 600,000 & 600,000 \\ \hline \end{tabular} Bonds payable, 12% Llabilities and Shareholders' Equity Liabilities: Current liabilities 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 $800,000 600,000 1,400,000 250,000 500,000 850,000 1,600,000 $3,000,000 SABINELECTRONICS Comparative Income Statement Dividends paid: Dividends paid: Preferred dividends Common dividends Total dividends paid Net income retained Retained earnings, beginning of year Retained earnings, end of year During the past year, the company introduced several new product lines and raised the selling prices on a number of ol order to improve its profit margin. The company also hired a new sales manager, who has expanded sales into several terms are 2/10,n/30. All sales are on account. Assume that the following ratios are typical of firms in the electronics in 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 2.5 to 1 Acid-test (quick) ratio 1.3 to 1 Average age of receivables 18 days Inventory turnover in days 60 days Debt-to-equity ratio 0.90 to 1 Times interest earned 6.0 times Return on total assets 13% Price-earnings ratio 12