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PROBLEM 15?18 Common-Size Statements and Financial Ratios for a Loan Application [LO15?1, LO15?2, LO15?3, LO15?4]

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PROBLEM 15?18 Common-Size Statements and Financial Ratios for a Loan Application [LO15?1;LO15?2, LO15?3, LO15?4];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 ye ars f ollow;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;708 Chapter 15;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.;Required;1. To assist in approaching the bank about the loan, Paul has asked you to compute the following;ratios for both this year and last year;a. The a mount of w orking capital.;b. The c urrent r atio.;c. The a cid-test r atio.;d. The average collection period. (The accounts receivable at the beginning of last year;totaled $250,000.);e. The average sale period. (The inventory at the beginning of last year totaled $500,000.);f. The ope rating c ycle.;g. The total asset turnover. (The total assets at the beginning of last year were $2,420,000.);h. The de bt-to-equity r atio.;i. The t imes i nterest e arned r atio.;j. The equity multiplier. (The total stockholders? equity at the beginning of last year totaled;$1,420,000.);2. For both this year and last year;a. Present t he ba lance s heet i n c ommon-size f ormat.;b. Present the income statement in common-size format down through net income.;3. Paul Sabin has also gathered the following financial data and ratios that are typical of companies;in the electronics industry;Current ratio........................... 2.5;Acid-test ratio.......................... 1.3;Average collection period.................. 18 days;Average sale period...................... 60 days;Debt-to-equity ratio...................... 0.90;Times interest earned ratio................ 6.0;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?

 

Paper#20275 | Written in 18-Jul-2015

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