Question

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.)

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