Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several electronic devices on which he had secured patents. Although the com...

Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several electronic devices on which he had secured patents. Although the com...

Q:


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

.

.

.

.

Requirement 1:

You decide first to assess the well-being of the common stockholders.

a) For both this year and last year, compute the earnings per share. There has been no change in preferred or common stock over the last two years.

b) For both this year and last year, compute the dividend yield ratio for common stock. The company's common stock is currently selling for $42 per share; last year it sold for $38 per share.

c) For both this year and last year, compute the dividend payout ratio for common stock.

d) For both this year and last year, compute the price-earnings ratio.

e) For both this year and last year, compute the book value per share of common stock.

f) Does the difference between market value and book value suggest that the stock is overpriced?

Requirement 2:

You decide next to assess the company's rate of return.

a) Compute the return on total assets for both this year and last year. (Total assets at the beginning of last year were $2,280,000.)

b) Compute the return on common stockholders' equity for both this year and last year. (Stockholders' equity at the beginning of last year was $1,299,000.)

c) Is the company's financial leverage positive or negative?



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