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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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Question;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 deviceson which he had secured patents. Although the company has been fairly profitable, it is now experiencinga severe cash shortage. For this reason, it is requesting a $500,000 long-term loan fromGulfport State Bank, $100,000 of which will be used to bolster the Cash account and $400,000 ofwhich will be used to modernize equipment. The company?s financial statements for the two mostrecent ye ars f ollow:Sabin ElectronicsComparative Balance SheetThis Year Last YearAssetsCurrent assets:Cash............................. $ 70,000 $ 150,000Marketable securities................ 0 18,000Accounts receivable, net............. 480,000 300,000Inventory......................... 950,000 600,000Prepaid expenses................... 20,000 22,000Total current assets................... 1,520,000 1,090,000Plant and equipment, net............... 1,480,000 1,370,000Total assets......................... $3,000,000 $2,460,000Liabilities and Stockholders? EquityLiabilities:Current liabilities.................... $ 800,000 $ 430,000Bonds payable, 12%................ 600,000 600,000Total liabilities........................ 1,400,000 1,030,000Stockholders? equity:Common stock, $15 par............. 750,000 750,000Retained earnings.................. 850,000 680,000Total stockholders? equity.............. 1,600,000 1,430,000Total liabilities and equity.............. $3,000,000 $2,460,000Sabin ElectronicsComparative Income Statement and ReconciliationThis Year Last YearSales.............................. $5,000,000 $4,350,000Cost of goods sold................... 3,875,000 3,450,000Gross margin........................ 1,125,000 900,000Selling and administrative expenses...... 653,000 548,000Net operating income................. 472,000 352,000Interest expense..................... 72,000 72,000Net income before taxes............... 400,000 280,000Income taxes (30%).................. 120,000 84,000Net income......................... 280,000 196,000Common dividends................... 110,000 95,000Net income retained.................. 170,000 101,000Beginning retained earnings............ 680,000 579,000Ending retained earnings............... $ 850,000 $ 680,000708 Chapter 15During the past year, the company introduced several new product lines and raised the sellingprices on a number of old product lines in order to improve its profit margin. The company alsohired a new sales manager, who has expanded sales into several new territories. Sales terms are2/10, 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 followingratios 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 yeartotaled $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 companiesin the electronics industry:Current ratio........................... 2.5Acid-test ratio.......................... 1.3Average collection period.................. 18 daysAverage sale period...................... 60 daysDebt-to-equity ratio...................... 0.90Times interest earned ratio................ 6.0Comment 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 companyis likely to get its loan application approved?

 

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