Need help with Accounting-Financial Ratios

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Problem 15-19 

This Year

Last Year

1.

a.

Net income...........................................

$280,000

$196,000

Average number of common shares (b) 

Earnings per share (a) ÷ (b).................

b.

Dividends per share (a).........................

Market price per share (b).....................

Dividend yield ratio (a) ÷ (b).................

c.

Dividends per share (a).........................

Earnings per share (b)..........................

Dividend payout ratio (a) ÷ (b).............

d.

Market price per share (a).....................

Earnings per share (b)..........................

Price-earnings ratio (a) ÷ (b).................

7.14

9.18

  Investors regard Sabin Electronics less favorably than other companies in the industry. This is evidenced by the fact that they are willing to pay only 7.14 times current earnings for a share of Sabin’s stock, as compared to 12 times current earnings for other companies in the industry. If investors were willing to pay 12 times current earnings for Sabin’s stock, it would be selling for about $67.20 per share (12 × $5.60), rather than for only $40 per share.

This Year

Last Year

e.

Total stockholders’ equity (a)...................

$1,600,000

$1,430,000

Number of common shares outstanding (b)........................................................

Book value per share (a) ÷ (b).................

  The market value is above book value for both years. However, this does not necessarily indicate that the stock is overpriced. Market value reflects investors’ perceptions of future earnings, whereas book value is a result of already completed transactions.

This Year

Last Year

2.

a.

Gross margin (a)....................................

$1,125,000

$900,000

Sales (b)................................................

Gross margin percentage (a) ÷ (b)........

b.

Net income (a)......................................

Sales (b)................................................

Net profit margin percentage (a) ÷ (b)...

 

c.

Net income............................................

Add after-tax cost of interest paid:

[$72,000 × (1 – 0.30)].......................

Total (a)................................................

Average total assets (b).........................

Return on total assets (a) ÷ (b).............

d.

Net income............................................

$ 280,000

$ 196,000

Average total stockholders’ equity.........

Return on equity (a) ÷ (b).....................

  e.  Financial leverage is positive in both years because the return on equity is greater than the return on total assets. This positive financial leverage is due to two factors: the bonds, which have an after-tax interest cost of only 8.4% [12% interest rate × (1 – 0.30) = 8.4%]; and the accounts payable, which may bear no interest cost.

3.  All profitability measures and the earnings per share are trending upwards, which is a good sign. However, the price-earnings ratio has dropped from 9.18 to 7.14. This decline indicates investor concerns about Sabin’s potential for earnings growth. Perhaps investors are concerned about Sabin’s accounts receivable and inventory management problems. Conceivably, this problem could worsen, leading to an eventual reduction in profits through an inability to operate, a suspension of dividends, and a precipitous drop in the market price of the company’s stock. That said, if Sabin can get its current assets under control the stock price may very well have the potential for further growth.







***You must work the entire problem which includes answering the theory questions***




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Average sale period. Debt-to-equity ratio Times interest earned ratio 0.90 6.0 a. Comment on the results of your analysis in (1) and (2) above and compare Sabin Electronics performance to the benchmarks from the electronics industry. Do you think that the company is likely to get its loan application approved? PROBLEM 15-19 Financial Ratios for Assessing Profitability and Market Performance (L015-2] Refer to the financial statements and other data in Problem 15-18. Assume that Paul Sabin has asked you to assess his company's profitability and stock market performance. Required: 1. You decide first to assess the company's stock market performance. For both this year and last year, compute: The earnings per share. There has been no change in common stock over the last two years. b. The dividend yield ratio. The company's stock is currently selling for $40 per share; last year it sold for $36 per share. The dividend payout ratio. The price-earnings ratio. How do investors regard Sabin Electronics as compared to other companies in the industry if the industry norm for the price-earnings ratio is 12? Explain. The book value per share of common stock. Does the difference between market value and book value suggest that the stock is overpriced? Explain. 2. You decide next to assess the company's profitability. Compute the following for both this year and last year: The gross margin percentage. The net profit margin percentage. c. d. e. a. b. cach of the red by your boss PROBLEM 15-18 Common Sun Statements and Financial Ratios for a Loan Application LOIS-1. 2015L015-3.015-4 as his organised Sabin Electronics 10 years ago to produce and sell several electronic devices in a severe cash shortage. For this reason, it is requesting a $500.000 long-term loan from Galleri State Bank. 100.000 of which will be used to bolster the Cash account and $400,000 of 지 will be used to moderne equipment. The concial statements for the rest can follow Sabin Electronics Comparative Balance Sheet This Year Last Year Assets Current assets: $ 70,000 0 480 000 950.000 20.000 1.520.000 1.480.000 $3.000.000 $ 150.000 18.000 300.000 600,000 22.000 1,090.000 1370 000 $2.480.000 . 2.) Marketable securities Accounts receivable.net Inventory Prepaid expenses Total current assets Plant and equipment, net Total assets Liabilities and Stockholders' Equity Liabilities: Current abilities Bonds payable, 12% Total liabilities Stockholders' equity: Common stock, $15 par Retained earnings Total stockholders' equity Total liabilities and equity $ 800,000 600.000 1,400,000 $430,000 600.000 1.030,000 750,000 850.000 1.800.000 $3.000.000 750,000 680,000 1.430.000 $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 1.125.000 900,000 653.000 548.000 Selling and administrative expenses 472.000 352,000 Net operating income 72.000 72.000 Interest expense 400.000 280,000 Net Income before taxes 120.000 84 000 Income taxes (30%) 280.000 196.000 Nat income 110.000 95.000 Common dividends 101.000 Net income retained 0 000 579,000 Beginning retained earnings 680,000 Ending retained earnings 170.000 $ 350.000
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