Question

Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several electronic devices on...

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 $500,000 long-term loan from Gulfport State Bank, $100,000 of which will be used to bolster the Cash account and $400,000 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 $ 70,000 $ 150,000   
  Marketable securities 0 18,000   
  Accounts receivable, net 480,000 300,000   
  Inventory 950,000 600,000   
  Prepaid expenses 20,000 22,000   
  
  Total current assets 1,520,000 1,090,000   
  Plant and equipment, net 1,480,000 1,370,000   
  
  Total assets $ 3,000,000 $ 2,460,000   
  
  Liabilities and Stockholders Equity   
  Liabilities:   
  Current liabilities $ 800,000 $ 430,000   
  Bonds payable, 12% 600,000 600,000   
  
  Total liabilities 1,400,000 1,030,000   
  
  Stockholders' equity:   
  Common stock, $15 par 750,000 750,000   
  Retained earnings 850,000 680,000   
  
  Total stockholders’ equity 1,600,000 1,430,000   
  
  Total liabilities and equity $ 3,000,000 $ 2,460,000   
  
Sabin Electronics
Comparative Income Statement and Reconciliation
This Year Last Year
  Sales $ 5,000,000 $ 4,350,000   
  Cost of goods sold 3,875,000 3,450,000   
  
  Gross margin 1,125,000 900,000   
  Selling and administrative expenses 653,000 548,000   
  
  Net operating income 472,000 352,000   
  Interest expense 72,000 72,000   
  
  Net income before taxes 400,000 280,000   
  Income taxes (30%) 120,000 84,000   
  
  Net income 280,000 196,000   
  Common dividends 110,000 95,000   
  
  Net income retained 170,000 101,000   
  Beginning retained earnings 680,000 579,000   
  
  Ending retained earnings $ 850,000 $ 680,000   
  

     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 2/10, n/30. All sales are on account.

     Assume that Paul Sabin has asked you to assess his company’s profitability and stock market performance.

c.

The return on total assets. (Total assets at the beginning of last year were $2,300,000.) (Round your percentage answers to 1 decimal place (i.e., 0.123 should be entered as 12.3).)


           

d.

The return on equity. (Stockholders’ equity at the beginning of last year was $1,329,000.) (Round your percentage answers to 1 decimal place (i.e., 0.123 should be entered as 12.3).)


             

e. The average sale period. (The inventory at the beginning of last year totaled $500,000.) (Round your intermediate calculations and final answers to 1 decimal place. Use 365 days in a year.)


            

f. The operating cycle. (Round your answers to 1 decimal place.)


            

j. The equity multiplier. (The total stockholders’ equity at the beginning of last year totaled $1,420,000.) (Round your answers to 2 decimal places.)

Homework Answers

Answer #1

C. Return on total Assets= EBIT or Net operating Income / Avg Net Assets

472000/(3000000+2460000/2)= 17.29

d. Return on equity= Net Income/ Shareholders Equity

170000/ (1600000+1430000/2) = 11.22

e. Avg Sale period= 365/ Accounts recievable turnover ratio

Accounts recievable turnover ratio= credit sales/ Avg Accounts recievable

5000000/(480000+300000/2)= 12.82

Hence Avg Sale period = 365/12.82 = 28 days

f. operating cycle= Avg Inventory period + Avg Sale period

Avg Inventory period= 365 days/ Inventory turnover ratio

Inventory turnover ratio= Cost of goods sold/ Avg Inventory

3875000/(950000+600000/2) =5

Hence Avg inventory period = 365 days/5 = 73 days

Hence operating cycle= 73 days + 28 days= 101 days

j. Equity multiplier= Total Asset value/ Total Net Equity

3000000/1600000= 1.88

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