Paul Sabin organized Sabin Electronics 10 years ago in order 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 certain key items of 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
$
70,400
124,000
Marketable securities
—
15,200
Accounts receivable, net
495,800
248,000
Inventory
995,000
496,000
Prepaid expenses
19,800
17,800
Total current assets
1,581,000
901,000
Plant and equipment, net
1,200,000
1,149,000
Total assets
2,781,000
2,050,000
Liabilities and Shareholders’ Equity
Liabilities:
Current liabilities
828,000
583,000
Bonds payable, 12%
400,000
Total liabilities
1,228,000
983,000
Shareholders’ equity:
Preferred shares, no par ($6; 21,520 shares issued)
269,000
Common shares, no par (unlimited authorized,32,000 issued)
320,000
Retained earnings
964,000
478,000
Total shareholders’ equity
1,553,000
1,067,000
Total liabilities and shareholders’ equity
Comparative Income Statement
Sales
5,200,000
4,150,000
Less: Cost of goods sold
3,987,000
3,280,000
Gross margin
1,213,000
870,000
Less: Operating expenses
676,000
517,000
Net operating income
537,000
353,000
Less: Interest expense
48,000
Net income before taxes
489,000
305,000
Less: Income taxes (30%)
146,700
91,500
Net income
342,300
213,500
Dividends paid:
Preferred dividends
20,000
Common dividends
93,600
71,200
Total dividends paid
113,600
91,200
Net income retained
228,700
122,300
Retained earnings, beginning of year
640,000
517,700
Retained earnings, end of year
868,700
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
Average age of receivables
18
days
Inventory turnover in days
60
Debt-to-equity ratio
0.90
Times interest earned
6.0
times
Return on total assets
13
%
Price–earnings ratio
12
Required:1.
To assist the Gulfport Bank in making a decision about the loan, compute the following ratios for both this year and last year (Use 365 days a year. Round your intermediate calculations to 1 decimal place. Round Debt-to-equity ratio to 3 decimal places and other answers to 2 decimal places.):
The average age of receivables (the accounts receivable at the beginning of last year totalled $246,000).
e.
The inventory turnover in days (the inventory at the beginning of last year totalled $492,000).
g.
The times interest earned.
.
For both this year and last year:
(a)
Present the balance sheet in common-size format.(Leave no cells blank - be certain to enter "0" wherever required. Round your answers to 1 decimal place.)
(b)
Present the income statement in common-size format down through net income.(Input all values as positive values. Round your answers to 1 decimal place.)
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