Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several electronic...


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 $640,000 long-term loan from Gulfport State Bank, $170,000 of which will be used to bolster the Cash account and $470,000 of which will be used to modernize equipment. The company's financial statements for the two most recent years follow:

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 3/10, n/30. All sales are on account. Assume Paul Sabin has asked you to assess his company's profitability and stock market performance.

Sabin Electronics Comparative Balance Sheet
This Year Last Year
Current assets:
Cash $126,000 $290,000
Marketable securities $0 $11,000
Accounts receivable, net $659,000 $440,000
Inventory $1,020,000 $735,000
Prepaid expenses $34,000 $36,000
Total current assets $1,839,000 $1,512,000
Plant and equipment, net $2,084,600 $1,470,000
Total assets $3,923,600 $2,982,000
Liabilities and Stockholder's Equity
Current liabilities $870,000 $440,000
Bonds payable, 12% $800,000 $800,000
Total liabilities $1,670,000 $1,240,000
Stockholder's equity
Common stock, $20 par $830,000 $830,000
Retained earnings $1,423,600 $912,000
Total stockholder's equity $2,253,600 $1,742,000
Total liabilities and stockholder's equity $3,923,600 $2,982,000

Sabin Electronics Comparative Income Statement and Reconciliation
This Year Last Year
Sales $5,700,000 $4,770,000
Cost of goods sold $4,015,000 $3,590,000
Gross margin $1,685,000 $1,180,000
Selling and administrative expenses $681,000 $576,000
Net operating income $1,004,000 $604,000
Interest expense $96,000 $96,000
Net income before taxes $908,000 $508,000
Income taxes (30%) $272,400 $152,400
Net income $635,600 $355,600
Common dividends $124,000 $103,000
Net income retained $511,600 $252,600
Beginning retained earnings $912,000 $659,400
Ending retained earnings $1,423,600 $912,000

Is the company's financial leverage positive or negative?

Financial Leverage:

A company's financial leverage refers to the relationship between its debt financing and its equity financing. It illustrated the risk profile of a company's current financial position.

Answer and Explanation: 1

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Recall that a company's financial leverage is positive when its return on assets is higher than the return on common stockholder's equity. We must...

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Financial Leverage: Definition, Formula & Calculation


Chapter 3 / Lesson 47

Learn about financial leverage and how to calculate leverage in this lesson. Use the financial leverage formula to understand how to maximize returns.

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